1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 AUGUST 29, 2017 10 11 ITEM B2 12 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 13 APPEAL OF 14 GILBERT P. HYATT 15 NO. 446509 16 17 AGAINST PROPOSED ASSESSMENT OF 18 ADDITIONAL INCOME TAX 19 20 21 22 23 24 25 26 27 Reported by: Kathleen Skidgel 28 CSR No. 9039 1 1 P R E S E N T 2 For the Board of Equalization: Diane L. Harkey 3 Chairwoman 4 Sen. George Runner (Ret.) Vice Chair 5 Fiona Ma, CPA 6 Member 7 Jerome E. Horton Member 8 Betty T. Yee 9 State Controller 10 Joann Richmond Chief 11 Board Proceedings Division 12 Henry D. Nanjo 13 Acting Chief Counsel 14 For Appeals Bureau: Grant Thompson Tax Counsel IV 15 Legal Department 16 For Franchise Tax Board: Bill Hilson 17 Tax Counsel 18 Scott DePeel Tax Counsel 19 Ann Hodges 20 Tax Counsel 21 For Appellant: Gilbert P. Hyatt Taxpayer 22 Edwin P. Antolin 23 Attorney 24 Michael W. Kern Representative 25 Bill Leonard 26 Representative 27 ---oOo--- 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 AUGUST 29, 2017 4 ---oOo--- 5 MS. HARKEY: Next item, I think we're going 6 to bring back Mr. Hyatt. And we have already made a 7 motion to negate the fraud penalty. And we've made 8 a motion to establish the year of residency being 9 October 20th, 1991. 10 So what are the remaining issues? 11 MS. MA: Sourcing. 12 MR. THOMPSON: That'd be sourcing and also 13 interest abatement. 14 MS. HARKEY: Okay. So sourcing and 15 interest abatement. 16 So, Mr. Hyatt, if you could just stick to 17 the sourcing argument and the interest abatement. 18 We've already established your residency as of 1991, 19 October 20th. So this is the 1992 tax year. 20 Residency is not an issue, so a lot of the exhibits 21 you may not have to go into. If you could just 22 stick to the sourcing and the interest abatement. 23 MR. HYATT: I understand. Thank you for 24 clarifying that. 25 MR. HORTON: Madam Chair, may I augment 26 your direction? 27 MS. HARKEY: I think you -- I think you 28 need to introduce yourselves again for the record 3 1 for this case, this particular case. 2 MR. ANTOLIN: Good evening. My name is 3 Edwin Antolin for appellant Gilbert Hyatt. To my 4 right, far right, is Mr. Hyatt, the appellant. To 5 my immediate right Mr. Kern, representative. And to 6 my left Bill Leonard, also representative. 7 MS. HARKEY: Thank you. 8 MR. HORTON: Madam Chair, let me share to 9 both the appellant and the Department, my concern is 10 relative to the business situs. Based on my read of 11 the evidence, Mr. Hyatt seems to have -- subsequent 12 to locating to Nevada, seems to have performed quite 13 a bit of activity relative to conducting his 14 business in Nevada. 15 So, unless there's evidence to the 16 contrary, from my perspective, I'd keep focus on 17 that. 18 MS. HARKEY: Would you -- okay. So what 19 are you asking the appellant to do? 20 MR. HORTON: I'm not asking him to do 21 anything. 22 MS. HARKEY: Okay. 23 MR. HORTON: I can't do that. 24 MS. HARKEY: Talk about business situs in 25 Nevada as of 1992. 26 MR. HYATT: Thank you for the guidance. 27 MS. HARKEY: Thank you. 28 MR. HYATT: This is important because 1992, 4 1 as far as business situs or sourcing or whatever we 2 call it, it's completely different, completely 3 different than '91. And that's why it's so 4 important to separate '92 and '91. 5 It's important to look at this because 6 putting it into perspective 1990, which we spoke 7 about and I won't again. 8 And then the 1992 period here, I don't 9 think you can read it, but I think that you can get 10 the idea of the different -- three different years. 11 What happened is in 1991, end of 1991, 12 there was income, Philips received income from three 13 license agreements: Sony, NEC and Sharp. The Sony 14 NE -- and -- the Sony and NEC license agreements 15 expressly used my Nevada apartment address in the 16 preamble. 17 None of these of course -- none of these 18 license agreements at all used me as the source of 19 the notice or the payments or anything like that. 20 It's all in the preambles. But the preambles I was 21 able to get them to -- Philips to change -- or Mahr 22 Leonard to change, I'm sorry. Mahr Leonard was 23 drafting these '91 agreements. And those two 24 were -- had my Nevada apartment address as I said. 25 Now, Philips had -- as part of the Philips 26 agreement, they had the right to take three months 27 to settle up accounts, if I could use that term. 28 That's my term, not that in the agreement. And that 5 1 let them get the expenses in, subtract expenses, 2 decide how much I was entitled to, and then pay me. 3 They usually -- this usually was taken care 4 of pretty quickly. But in this time frame, because 5 of the end of the year and other things, they 6 carried -- they received the funds for those three 7 license agreements about $23 million -- no, I'm 8 sorry. My share would have been $23 million. But 9 they, um -- they paid that in the -- in January of 10 '92. 11 So what we -- what we essentially have is 12 the dichotomy is -- and it has been misunderstood 13 before, so I want to make it very, very clear. 14 There was very little licensing activity in the 1992 15 disputed period until -- which ended when I moved 16 into my house. Very little licensing activity. And 17 there was only -- if you excuse my expression -- 18 only $4 million received from licensing payments in 19 the first quarter of -- in that disputed 1992 20 disputed period, only $4 million, and only a little 21 bit more than a million dollars of that was mine. 22 That was received in the first -- in the '92 23 disputed period. 24 However, however, there was the $23 million 25 that was carried over from 1991 income to Philips. 26 So we have the dichotomy that very little income in 27 1992 to Philips or -- excuse me, from licensees, but 28 a lot of income to me personally from Philips, which 6 1 came in January. 2 Therefore, I think that it's important to 3 note, and it's for your decision, of course, that 4 the licensing activities, like my signing license 5 agreements for Philips and for those three license 6 agreements and such, was done in '92 and you already 7 decided that there was sourcing for '92. 8 But for ninety -- I'm sorry. For '91, 9 there was sourcing for '91. That activity was done 10 in '91. And I make note that for '92, I did receive 11 that income and that's part of the '92 taxes. But 12 there was no licensing activity on anyone's part, 13 because that was merely Philips paying me what they 14 owed me from the previous year. 15 So I would hope that in your wisdom you can 16 decide that -- that the $23 million that came in in 17 January, which had no licensing activity in 1992, 18 was not sourced or business in 1992 and it ended in 19 nineteen -- and the sourcing that you decided 20 against me ended in 1991. 21 There are much more compelling reasons for 22 that. But this one is a starting point because it's 23 a lot of money that came in to me, but not from -- 24 not from licensees, except Philips being of course 25 my exclusive licensee. 26 The, um -- in January, I received 27 $23 million from Philips on the 14th, January 14th 28 and 15th. The FTB has said that I received 7 1 $48 million at that time, a $24 million error. 2 You've probably heard about that. You'll hear a lot 3 more about it. 4 The FTB made a $24 million error in the NPA 5 for the 1991 audit, and they continued to refuse to 6 correct it and even pay attention to our complaints 7 about that until your Legal Department, in all their 8 wisdom, ordered them to do so in what we call the 9 first additional briefing. And there the FTB agreed 10 that the -- the funds did not come in at this point 11 in January 1992, within the disputed period, but 12 instead, came in in this time, after the disputed 13 period, long after the disputed period. 14 I was very happy to hear Mr. Hilson state 15 to this Board that at the end of the disputed 16 period, April 3rd, that -- that Philips' 17 correspondence with the California addresses dropped 18 off at that point. And he's definitely right, they 19 dropped off considerably. In fact, Philips started 20 catching up with using my Nevada addresses at the 21 end of '91, going into '92. And there were hundreds 22 of Philips' documents in the '92 period that had my 23 Nevada addresses on it. And what you'd find if you 24 plotted it, is you would find the Philips 25 correspondence with California -- misaddressing 26 correspondence to California started significantly 27 here until they got -- until they got moving, it 28 dropped down and dropped down as we got to the end 8 1 of '92 -- '91. And then in '92 there were the 2 buildup of Nevada address documents started 3 increasing significantly, and the California 4 addressed -- misaddressed documents started dropping 5 off significantly. 6 So for that reason alone, '92 sourcing is 7 completely different than '91 sourcing and you 8 really need to consider the new different facts for 9 '92 sourcing than the ones that you decided against 10 me for '91 sourcing. 11 One of the issues, the major issues for the 12 FTB for '91 sourcing was I signed a lot of 13 agreements for Philips. Well, I did. Philips asked 14 me to and they did and they indemnified me. But in 15 the '92 disputed period, there were none. I didn't 16 sign any agreements for Philips in that '92 disputed 17 period until, as Mr. Hilson so well said, in April 18 '92 the correspondence to California from Philips 19 dropped, um -- dropped off. 20 Even more so -- in addition -- okay. The 21 only money that I distributed for Philips in that 22 disputed, '92 disputed period was a small -- small 23 part of the $4 million that came in from Oki, but 24 that, too, was money that we received in the first 25 part of '92 that was obtained from the '91 licensing 26 activity. 27 So even though you decided that that was -- 28 that was sourcing in California for '91, it should 9 1 not be sourcing for -- to California for '92 because 2 it -- there was no sourcing activity for that Oki 3 income in '92. It was just receiving the 4 information from Oki and then distributing it. And 5 it was only a very small amount. 6 So then we get back to the $24 million 7 error. The FTB made -- and this is strictly '92 8 sourcing, so please bear we me. I am limiting it, 9 trying to limit it to 1992 activities as you've 10 guided me. 11 The FTB in the 1990 -- 1991 NPA, Notice of 12 Proposed Assessment, threw in another $24 million. 13 We believe -- I believe it was to help intimidate me 14 so that I would settle a bad assessment. But 15 whatever the reason, it was a $24 million error. We 16 told them that money did not come in in the 17 disputed -- in the '92 disputed period. They 18 insisted it came in on January 15th, 1992, and they 19 continued to insist on that for maybe 15 years. And 20 we kept telling them in all our -- in our continued 21 documents, our briefings, and the like, that they 22 made this major error and here are the real facts. 23 And it wasn't, again, until your legal 24 staff required them to tell when that money came in 25 that they finally admitted that it came in well 26 after the disputed period. The disputed period 27 ended July -- April 3rd. That money came in in July 28 31st, October 5th, and December 29th. And, um -- 10 1 and it didn't come in to me. It came in to Philips. 2 It went directly to Philips. 3 Philips, for those -- there are four 4 licenses in those periods, in those $24 million 5 error payments. Four licenses. I had no part in 6 them. 7 Philips took over the licensing from Mahr 8 Leonard, who they had given exclusive negotiating 9 rights to. That ended at the end of 1991. Philips 10 started negotiating these four license agreements, 11 negotiated them with the Japanese, made trips over 12 there, got it signed, they signed it. I didn't sign 13 those agreements at all. 14 They used my Nevada contact information in 15 the preambles of them. The money was 16 wire-transferred from the Japanese companies direct 17 to Philips' account in New York. And then Philips, 18 in some reasonable time, paid me my share of it. 19 So it went from New York to Japan, back to 20 New York, to Nevada. Didn't touch California 21 at all. The $24 million error. And it was well 22 after the disputed period. Well after Mr. Hilson 23 admitted that the -- if you permit me to call it -- 24 the Philips misaddressing was significantly reduced. 25 Please forgive me for repeating, but I want 26 to emphasize again there is no similarity, none at 27 all, between what happened in the 1992 sourcing 28 activities, if I might call it that, and what you 11 1 decided was California sourcing for 1991. They're 2 completely different situations. 3 Again, the, uh -- the money that came in in 4 the '91 disputed -- the '92 disputed period, at the 5 risk of repeating, was negotiated and signed and all 6 worked out in 1991, so there -- it cannot be accrued 7 to 1992. There was none of that so-called business 8 activity for those various license agreements. 9 What did occur in 1992, first the disputed 10 period or the first -- essentially the first 11 quarter, was Philips sent me a letter that verified 12 their, um -- excuse me, that they were exclusive, 13 they had exclusive authority to license my payments, 14 and I signed it for Philips and sent it back to 15 them. And that let them -- confirmed to the 16 license -- sublicensee that they had authority to 17 negotiate. I did not negotiate. I, um -- as I 18 said, I didn't sign any license agreements for 19 Philips in that '92 disputed period. I didn't -- 20 let's see. 21 The California Post Office Box, which was 22 on the ninety -- some of the '91 license agreements, 23 was absolutely not on any license agreements in, 24 um -- in 1992. Philips had made that complete 25 changeover. Actually, when they took it away from 26 Mahr Leonard when Mahr Leonard ended at the end of 27 1991, so did the use of any California addresses in 28 the preambles. And actually that stopped -- that 12 1 ended in December because the -- as I said, the, 2 um -- NEC and Sony license agreements had my Nevada 3 street address on them. 4 As I mentioned, Mahr Leonard engagement had 5 expired. 6 Let's see. There were much fewer 7 misaddressed documents. And, in fact, in the -- I 8 don't have the exact numbers right in front of me, 9 but I believe that there were hundreds of Philips' 10 correspondence that had my Nevada addresses on it in 11 1992. And it did not drop -- it did not drop off 12 sharply as one might think, that they finally got 13 the word and did it. It's just that their staff 14 just took more time in correcting their problems and 15 getting their boilerplate or their -- um -- um -- 16 uh, what would you call it -- the template letters 17 out of their system or corrected. But it didn't 18 happen instantaneously, so there will be some 19 remnants continuing. 20 There's also another thing that came in in 21 February -- on February 12th. It was $52,000 from 22 Sharp on a, um -- some sort of a fringe agreement 23 that had been negotiated in 1991 and at -- it was 24 only $52,000. So there's very, very little going on 25 in the first quarter of '92, the end of the disputed 26 period. 27 The big thing was the $24 million error. 28 Now what the FTB says about that $24 million error, 13 1 after ignoring it for a long, long period of time 2 and refusing to even comment, they now say that, 3 well, they didn't -- he didn't provide the evidence 4 that we needed, so therefore we didn't know what to 5 do. And that's absolutely false. 6 What happened is the auditor generated a 7 letter requesting that information in January, I 8 think it's 1996, and she said send certain types of 9 documentation, and we did. We sent that 10 documentation that she requested. And I had to go 11 to my investment -- my investment, um -- financial 12 organizations to get it. And they sent me certified 13 or notarized or formal -- excuse me -- they sent me 14 formal statements as to when that information was 15 received. 16 So -- and we provided that all to the FTB 17 right away. And they now say that, well, that 18 wasn't enough. That wasn't what we asked for. 19 Well, it was exactly what they asked for. We were 20 very careful of that. And then, even more so, they 21 didn't say, well this is -- they never told us this 22 is not good enough, we want something more. 23 The auditor never said that. She was just 24 really glad to get the '92 audit closed and get her 25 promotion based upon that. 26 So here they're making up stories. The 27 lawyers are making up stories that are contrary to 28 the facts. And you'll probably hear a lot about 14 1 that, but please keep in mind we gave the auditor 2 what she asked for in her letter. She never asked 3 for anything more. She never asked for any 4 correction. She never complained about that. And 5 now they're bringing it up as lawyers arguments 20 6 years later. 7 MS. HARKEY: Mr. -- Mr. Hyatt, we've heard 8 a lot of the stuff again and again, and I know 9 you're searching for thing that just relate to 10 situs. But you don't have to take all of your time. 11 You can have a little more on rebuttal if you 12 wouldn't mind, so we can hear what the FTB has to 13 say about situs. 14 It's just getting very, very late and I -- 15 you know, there's a lot of information, but I think 16 a lot of it was actually heard in 1991. I 17 understand the difference and that's why we're 18 focusing on situs. But I -- I would just ask that 19 you keep it brief, unless there's something really 20 new that you need to bring up. And then you can 21 come back and have a little longer on rebuttal if 22 the FTB says something that you object to. 23 MR. HYATT: Thank you for that guidance. 24 Let me see if there's some more very compelling 25 things I need to say. 26 Relative to the $24 million issue, let's 27 see, the binders, Tab 124 and 125 -- 28 MS. HARKEY: Was the 24 million reversed? 15 1 MR. HYATT: No. In fact, I'll outline the 2 situation, Your Honor. 3 What happened is they -- let me try to 4 explain what they did. For a long period of time, 5 they had $48 million assessed that came in in 6 January 14th and 15th when there was only 7 $23 million that came in, actually came in on that 8 time frame, which was a carryover from the work done 9 and licensing in '91. 10 They then admitted, in response to your 11 Legal Department's order, they briefed it and 12 admitted that that money didn't come in until well 13 after the disputed period. But -- but the 14 assessments and the NPA still reflect $48 million 15 came in on January 15th and it's -- and they, um -- 16 and it still reflects it to this day. 17 And the, um -- um -- and even though the 18 fraud penalty is -- has been removed, still to their 19 bad faith, if you excuse my expression, they 20 continued with their fraud penalty on the 21 $48 million even after, even after moving that 22 $24 million to the -- to the post disputed period. 23 And I have to emphasize they never, never, 24 never audited that post disputed period or protested 25 it. And we have a lot of evidence in the record 26 about all of the Philips correspondence that I 27 received, among other things, in addition to the 28 disputed period to the post disputed period. 16 1 So the way it stands right now is we have a 2 situation where $23 million coming in in 3 mid-January, but penalties -- taxes and penalties, 4 taxes and penalties still remaining on $48 million 5 that allegedly came in in mid-January. And even 6 though the -- and this income here and the post 7 disputed period is -- yeah, they admit it came in 8 there but they didn't change any of their 9 assessments in January. 10 MS. MA: I think we got it. 11 MS. HARKEY: Yeah. Okay. Thank you. 12 Would you mind just, we'll come back later 13 on rebuttal, rather than going through more? 14 Because we've heard about the 24 million several 15 times. I understand now the NPA still reflects the 16 48 million. We're dealing strictly with situs. 17 We've established residency issue and the fraud. 18 So if we could -- if we could just hear 19 from the FTB, it would be very helpful. And then 20 allow you to come back and refute that on an 21 item-by-item if you choose. 22 MR. HYATT: Thank you, Your Honor. I'm 23 very sorry to have dragged this out. This is so 24 important to me. 25 MS. HARKEY: No, I understand. It's 26 important to us, too. And I think you can tell 27 we've devoted the entire day to it. And that's why, 28 as much as I'd love to hear more, I think we're 17 1 repeating the same information. I can hear you 2 going over and over. 3 So if we could hear FTB, and then you can 4 come back and you could have a lengthy time, half 5 hour or more to discuss your rebuttal. Because 6 we're just down to the one issue, and I think a lot 7 of Members have already got kind of your argument in 8 their heads. 9 And so we'll -- I just would appreciate if 10 you could do that for us, and then we'll come back 11 to you and give you time to formulate your other 12 points that you want. 13 MR. HYATT: Thank you, Your Honor. 14 MS. HARKEY: Thank you. 15 Okay, FTB. Yes. Introduce yourself for 16 the record and we are onto just the two items. 17 Thank you. 18 MR. HILSON: Thank you, Chairwoman Harkey. 19 Yes, I'm William Hilson, and together with my 20 colleagues Scott DePeel and Ann Hodges, we represent 21 the Franchise Tax Board in this matter. 22 If I may, I'd like to make a few prefatory 23 comments in keeping with your guidance to focus on 24 the situs issue. Obviously, I am going to heed your 25 instructions and do that. 26 My -- my explanation is that my 27 presentation that -- as I had prepared it for 1992, 28 was very similar in format and style and approach to 18 1 1991. I've, again, got the foam boards. I've again 2 got the monthly summaries. I've had them copied and 3 distributed to you. I hope you got them. 4 You will see that I have it broken down by 5 date, once again. And there are, of course, 6 references to things such as dining and other -- 7 that are more personal, and clearly the primary 8 focus is residency. 9 I will do my best to skip that stuff as we 10 go through, but to the extent that I get a little 11 bit herky-jerky in dealing with things, that's -- 12 that's the reason why. And so, you know, if I'm 13 jumping a little bit or moving around, it's 14 basically trying to heed your -- heed your 15 direction. 16 MS. HARKEY: We understand. And if for 17 some reason you start bouncing back and forth, we'll 18 ask you to delay. 19 MR. HILSON: That's fine. Yeah, if I've 20 jumped from something and it doesn't make any sense, 21 please let me know. You know, it's been -- 22 MS. HARKEY: I under -- I understand. 23 It's -- it's -- I wish we could have done these both 24 together. I think we, at the Board, have the 25 ability to separate years. 26 MR. HILSON: Sure. 27 MS. HARKEY: We've done it before in other 28 cases. But unfortunately, we're here. 19 1 MR. HILSON: And I understand that. And I, 2 like everybody else, appreciate the fact that it's 3 been a long day and we want to run that balance of 4 getting it -- getting it right and getting it as 5 complete as we can, yet at the same time get out of 6 here. 7 So, with that, let me move on. 8 Okay. Earlier today I discussed with you 9 the appellants business activity, his personal 10 activity throughout 19 -- the latter part of 1991, 11 and the consistent use of the California street 12 address, the Post Office Box, the telephone and 13 telefax lines in connection with the pursuit of the 14 monies and the operation of the patent licensing 15 business throughout the remainder of 1991. 16 We believe that conduct continues in 1992. 17 Starting with January 6th, we see the appellant 18 author and sign correspondence to Philips in which 19 he transmits the original contract that Sharp sent 20 him at Jennifer Circle on December 25th, again 21 stating the points of contact at the Cerritos Post 22 Office Box and the Jennifer Circle phone number. 23 Uh, don't care about the mother's estate. 24 On the -- on the 6th we see him execute an 25 amendment to the $10 million contract with Oki 26 Electric. The amendment revises four or five of the 27 13 enumerated paragraphs; but the one thing it 28 doesn't change is the representation of the 20 1 Cerritos -- the presence in Cerritos and the 2 Cerritos Post Office Box. 3 We've got on the -- on the 8th we've got 4 another business trip to New York, most likely to 5 upstate New York with Philips. 6 On the -- on the 9th, once again, we see 7 the United States Patent Office sending 8 correspondence to appellant at the Cerritos Post 9 Office Box as requested and/or directed. 10 The 13th we see the same type of thing, 11 Mahr Leonard faxes correspondence regarding NEC to 12 appellant via the Jennifer Circle fax machine. 13 And on the -- on the 14th, in addition to 14 some of the monies being disbursed, which I'm going 15 to talk about in a second, we see Oki sign that -- 16 send that originally signed amendment to its October 17 1991 contract to the appellant at Jennifer Circle; 18 once again, putting La Palma and Jennifer Circle in 19 the middle of all of this business activity. 20 The 14th, as Mr. Hyatt has acknowledged, is 21 the date that Philips, shall we say, releases the 22 20-plus-million dollars that -- Mr. Hyatt's share of 23 the income that was received during December 1991 24 from Sharp -- Sharp, Sony and NEC. 25 As I pointed out earlier, the Sharp money 26 came in on December 20th, 1991; the Sony money came 27 in on December 24th; NEC comes in on December 27th, 28 it comes into Los Angeles. At that point in time 21 1 Mr. Roth disburses the 15 -- the respective 15 2 percent to Mahr Leonard and sends Mr. Hyatt's share 3 and Philips' share off to New York where it sits 4 until the 14th. 5 I think there's a very good argument to be 6 raised that that money was realized by the appellant 7 during December of 1991; and had it been received or 8 acknowledged and taken into income on his tax return 9 in 1991, I dare say you may have already ruled that 10 that was California-sourced income. 11 Be that as it may, the other -- the other 12 thing that happens in terms of income, as Mr. Hyatt 13 acknowledges is, during January, the Oki contract; 14 it's a $4 million payment that is made during 15 January 1991. I believe it also goes through Los 16 Angeles and is -- it is distributed by Mr. Hyatt 17 during January, after -- same thing, 15 percent to 18 Mahr Leonard. He manages it, he distributes it and 19 he sends off to Philips their $1.7 million share, 20 which would be roughly what he got as well, given 21 the approximate 50/50 split on these things. 22 On the 17th, we see the appellant's Los 23 Angeles lawyer writing to appellant, forwarding to 24 him a letter he received from Hitachi, confirming a 25 meeting in Anaheim on January 29th, and dinner the 26 night before on January 28th. The mailing is 27 addressed to Mr. Hyatt via the Cerritos, California 28 Post Office Box. And it's also a date where the 22 1 appellant takes a return flight from the east coast 2 back to LAX. 3 Don't care about the mother's estate. 4 Moving to -- moving to the 24th. The 5 appellant again authors and signs a letter to 6 Philips with which he forwards the originally signed 7 amendment on the Oki contract, which Oki had sent to 8 him at Jennifer Circle. And, again, states he can 9 be contacted via the Cerritos Post Office Box and 10 Jennifer Circle phone number. He's also, on this 11 date, the Cerritos, California addressee on 12 correspondence from the United States Patent Office. 13 On the -- on the 26th, he again meets with 14 his Los Angeles lawyer and -- excuse me, on the 25th 15 he meets with the Los Angeles lawyer, and on the 16 26th he, again, authors a letter and telefaxes it to 17 Philips, providing the contact information once 18 again, Cerritos Post Office Box, Jennifer Circle 19 phone and fax machines. 20 On the 31st, as he did on December 30 -- on 21 January 31st, and as he did on December 31st, 22 Mr. Roth, Mr. Hyatt's Los Angeles lawyer, issues a 23 bill for professional services and sends it to Mr. 24 Hyatt at the Cerritos Post Office Box. It also sees 25 Philips address a letter to Mr. Hyatt at his 26 Cerritos Post Office Box and send it to him 27 versus -- via to telefax machine. 28 In that letter -- this is the -- this is 23 1 the letter we talked about earlier where Philips 2 ghost-writes the letter to Toshiba, asks Mr. Hyatt 3 to place it on Gilbert Hyatt stationery. And two 4 days -- three days later he does so. 5 In the interim, on February 2nd, Mr. Hyatt 6 goes to -- or either goes to -- or, excuse me, 7 before I get there, on February 1st the New York 8 Times publishes an article regarding Mr. Hyatt and 9 his business activities. And after stating they 10 caught up with him in La Palma, they attribute to 11 him a very accurate statement that six of Japan's 12 largest companies have now agreed to make payments 13 to him. 14 On the 2nd, Mr. Hyatt writes the Cerritos 15 Post Office Postmaster regarding his post office 16 box, adding to it permissive -- permissive users in 17 the form of -- or in the names of Grace Jeng and 18 Barry Lee. Again, stating that -- affirmatively 19 asserting in it that he's adding them to "my post 20 office box" so that they can receive mail through 21 "my post office box." 22 The return address on this is once again 23 the Cerritos, California Post Office Box. And I 24 raise this because Mr. Hyatt is not only continuing 25 to use the post office box, he's unequivocally 26 asserted dominion and control over this constantly 27 used patent licensing business mainstay. 28 The 3rd, again, is the Gilbert Hyatt 24 1 stationery in the letter to Toshiba, confirming 2 Philips' ability to negotiate with respect to 23 3 patents. 4 On the 4th, we -- the appellant sends three 5 letters to Philips. By their terms, two were sent 6 by telefax and one by express mail; the first is a 7 telefax transmission regarding Sanyo's annual 8 earnings. Sanyo's the target at this point. And 9 the second is correspondence which was pursuant to 10 the New York court, partially redacted. But both of 11 these letters, again, are signed by Mr. Hyatt, 12 reflect the Cerritos Post Office Box and both the 13 Jennifer Circle phone and telefax numbers. 14 The third letter this date is sent by 15 express mail, reflects his dividing the $4 million 16 Oki payment and disbursing it to Philips its share. 17 As I mentioned earlier, this disbursal is 18 also done by Mr. Hyatt with the appropriate cover 19 letters and checks to Philips and, uh -- and Mahr 20 Leonard. Checks also are drawn on the California 21 account with the address, the imprint of Mr. Hyatt 22 at Jennifer Circle in La Palma. 23 On the 8th, moving forward, we see the 24 appellant write a letter to Philips in which he 25 complains about the amount of the patent license fee 26 they had been targeting from Minolta as being much, 27 much too low. And again stating he can be contacted 28 via the Cerritos Post Office Box and the two phone 25 1 numbers at Jennifer Circle. 2 The 10th, again, Mr. Hyatt exchanges 3 correspondence with Philips. The Hyatt-authored 4 correspondence states he can be contacted via the 5 Cerritos Post Office Box and the Jennifer Circle 6 phone number. And the Philips correspondence is 7 addressed to Mr. Hyatt at the Cerritos Post Office 8 Box. 9 On the 10th he also meets with his Los 10 Angeles lawyer regarding business activities. 11 And when we get -- when we get to the 11th, 12 Mr. Hyatt is admitted to the hospital in Los 13 Alamitos where he's an inpatient for the next 10 or 14 11 days. 15 During that -- during that time period, 16 however, the business activity is keeping up and we 17 see -- and we see the -- Mr. Roth in Los Angeles 18 starting to step up. And he starts -- we start to 19 see him undertake almost daily activities to keep 20 the California licensing business moving forward. 21 His billing -- as his billing records show, he's 22 engaging in continuous -- he's continuing in 23 activity with the, uh -- with the Japanese in 24 particular on a near daily basis during Mr. Hyatt's 25 hospitalization. Similarly, the business-related 26 documents and correspondence are continuing to come 27 in and through California. 28 On the 12th, Sharp submits to the, uh -- 26 1 I'll skip that. 2 On the 19th, we once again see the patent 3 office sending official business correspondence to 4 Mr. Hyatt at the Cerritos Post Office Box. 5 On -- after -- after Mr. Hyatt's released 6 from the hospital, we see a Dow Jones press release, 7 issued from California on February 24th, attributing 8 to Mr. Hyatt the very true statement that six 9 Japanese electronic manufacturers have signed 10 license agreements regarding his patents. The press 11 release states it's coming from La Palma and that 12 the source of the information was Mr. Hyatt himself. 13 On the 25th, we again see Mr. Hyatt meeting 14 with his Los Angeles lawyer. 15 On the 26th, Philips again address business 16 correspondence to appellant at his Jennifer Circle 17 home and sends it to him via the fax -- via the fax 18 machine. 19 On this day we again see the United States 20 Patent Office sending official business 21 correspondence to the appellant via the Cerritos 22 Post Office Box. 23 On the 27th, we see Philips again write to 24 Mr. Hyatt via his Jennifer Circle address. Among 25 other things, the letter -- the letter -- the letter 26 sent provided a summary of the income and expenses 27 for the time period October 1st, 1991 through 28 December 31st, 1991. Among other things, the letter 27 1 unequivocally states by December 31st, '91 licensing 2 fees had been received from Fujitsu, Matsushita, and 3 as well Sharp, Sony and NEC. The letter goes on to 4 state that after expenses the gross proceeds to be 5 divided between them by the end of 1991 was slightly 6 under $80 million. 7 On this same date, a G. Hyatt signs for a 8 Fedex delivery, addressed to Mr. Hyatt and sent by 9 Philips the prior day. The location of that 10 delivery and signature is Jennifer Circle. The 11 intended recipient phone number, the Jennifer Circle 12 phone number. 13 On this date the appellant also signs a 14 first amendment to the Patent Agreement with 15 Fujitsu. As with the original agreement, it's 16 signed only by Mr. Hyatt, no mention of Philips 17 anywhere, and even though there are it amends -- it 18 amends certain provisions, it doesn't change the 19 stated reference to Cerritos. 20 Moving into March, March 3rd, we again 21 see -- we again see a meeting with the -- with 22 Mr. Roth in Los Angeles and Philips sending a parcel 23 to the appellant by Federal Express, addressed to 24 the appellant at Jennifer Circle, and signed for by 25 a G. Hyatt. 26 Fifth, no. Sixth, no. 27 On the 10th, Philips again addresses and 28 sends by telefax a letter to Mr. Hyatt. The address 28 1 on the letter is the Cerritos Post Office Box and 2 the address on the proof of successful telefax 3 transmission is Gil Hyatt dash Cerritos. 4 On March 11th, we see the appellant fly 5 from Denver to Los Angeles, LAX, on a return from a 6 business trip. 7 On the 12th, we see appellant's Los Angeles 8 lawyer sending him a letter for which he transmits 9 the originally signed first amendment to the Patent 10 Licensing Agreement with Fujitsu. The letter, once 11 again, Cerritos Post Office Box. 12 On -- don't need that. 13 On the 13th, again, we see Philips sending 14 business correspondence addressed to appellant at 15 the Cerritos Post Office Box. 16 Twenty-third, we again -- 22nd and 23rd we 17 again see meetings with the Los Angeles lawyer. 18 On the 24th, we once again see 19 correspondence from -- we see correspondence from 20 the United States Patent Office, sending official 21 business correspondence via the Cerritos Post Office 22 Box. 23 The 26th, we see the appellant author and 24 send a telefax to Philips. The telecopier cover 25 sheet provides his return contact information, Gil 26 Hyatt, together with the Cerritos information and 27 the Jennifer Circle telephone and telefax lines. 28 On the 30th, we see the appellant meeting 29 1 again with his lawyer in Los Angeles. 2 On the 31st, we see the appellant and his 3 Los Angeles lawyer engaging in a 12-hour meeting 4 with representatives of Hitachi in Orange County; 5 his lawyer sending correspondence and a copy of a 6 tax payment certificate from Sharp to appellant at 7 his Cerritos Post Office Box; and Philips sending 8 yet another Fedex parcel to Mr. Hyatt, a parcel 9 which is once again sent to Jennifer Circle and 10 delivered to that address on the following day, 11 April 1st. 12 April 2nd is the following day. 13 MS. HARKEY: Okay. Sir, we -- we can read 14 all of this. So if you can just get to maybe the 15 next -- 16 MR. HILSON: Yeah. 17 MS. HARKEY: -- the next item. 18 MR. HILSON: Okay. 19 MS. HARKEY: Let's be sure that these 20 exhibits are part of the record so that we can -- 21 even though not enumerated, we have considered 22 them. 23 MR. HILSON: Okay, thank you. 24 MS. HARKEY: Mm-hmm. 25 MR. HILSON: Appellant's business 26 enterprise did not sever itself from California at 27 any time during 1991, and it didn't do so in 1992 28 either. 30 1 As we've demonstrated, that business was 2 created, developed and operated in and from 3 California. That business generated more than $96 4 million in gross revenues during 1991. All of that 5 revenue was paid to the appellant in California, and 6 the 1992 revenues continued to be paid through 7 California. 8 The intertwining of that business with 9 California is clearly seen in the dealings with the 10 Japanese corporation Hitachi, dealings which led to 11 Hitachi paying the appellant more than $56 million 12 in 1992, a payment which, as required, was made 13 through California. 14 Long before April of 1992, it was -- it's 15 clear that Hitachi was a target. 16 A few minutes ago I told you that appellant 17 and his Los Angeles lawyer engaged in a 12-hour 18 meeting with representatives of Hitachi in Orange 19 County. That was the fourth in-California meeting 20 which had occurred with Hitachi by that date, 21 meetings which included a steady level -- rise in 22 the level of wining and dining, implemented by 23 appellant's patent licensing team, primarily by Mr. 24 Roth in Los Angeles and all of which occurred in 25 California. 26 The first meeting was held at the Hotel 27 Bel-Air in Los Angeles, originally confirmed by 28 means of a telefax by Hitachi's lawyers to appellant 31 1 at the Jennifer Circle home during November. 2 The second meeting was arranged by means of 3 correspondence between Hitachi's Deputy General 4 Manager and Mr. Roth and occurred in Orange County. 5 Spanning two days, Mr. Roth's billing records reveal 6 that the parties met and dined together on January 7 28th and met for another six and a half hours on the 8 29th. 9 Less than three weeks later, Mr. Roth 10 spearheads a third negotiation session, which 11 involves golf at the Pelican Hill Golf Club near 12 Corona Del Mar, an afternoon meeting at the Four 13 Seasons Hotel in the Newport Center, and dinner that 14 evening. Mr. Roth's billing records tell us that 15 was a 14-hour business day. 16 Nine days later, Hitachi's General Manager 17 sends Mr. Roth a letter thanking him for his 18 hospitality the week prior, and particularly so with 19 respect to the document review session at the 20 Pelican Hill Golf Club. In that letter Mr. Akaki 21 suggests another meeting in the Los Angeles area at 22 the end of March 1992. 23 That meeting occurred on March 31st and, 24 like its predecessor, included golf at the Pelican 25 Hill Golf Club followed by a meeting at the Four 26 Seasons Hotel. Mr. Roth's billing records tell us 27 that this was a 12-hour day for which he had 28 prepared an additional eight hours the prior day. 32 1 Appellant pens his signature to the 2 contract with Hitachi during July of 1992. Between 3 the conclusion of the meeting with Hitachi on March 4 31st and the date appellant signs that contract, 5 Mr. Roth's billing records reveal an additional 6 14 -- 42 instances of billing specifically 7 identified as being attributable to the Hitachi 8 matter, and which total more than a hundred hours of 9 additional professional services. 10 The services rendered include many things, 11 including telephone calls and meetings with the 12 appellant, dealing with market data regarding 13 Hitachi sales figures, dealing with correspondence 14 to and from Hitachi, as well as drafting and 15 revising the contract. 16 Mr. Roth's records also reveal that between 17 March 30th and June 22nd, Caroline Cosgrove was 18 providing appellant and his lawyers with research 19 services regarding various market data, particularly 20 with emphasis on Hitachi. Ms. Cosgrove submits some 21 13 billings to Mr. Roth during that time period, 22 accounting for approximately 400 hours of research 23 services, some -- all of which are performed in 24 California. 25 Is there anything wrong with this type of 26 activity, the wining and dining and paying the 27 professionals and getting the research done? Of 28 course not. It's commonplace. It's the type of 33 1 thing we see in business activities, and they're 2 recognized as business deduction. However, the 3 point is they're part of conducting a business. 4 The appellant didn't just get hundreds of 5 millions of dollars from the Japanese by saying 6 these are my patents, you got to pay me. He had to 7 go out and get it. And the way he went out and he 8 got it was by concocting and devising the business 9 plan, devising it, getting it going, in California. 10 Hiring the professionals to help him out in 11 California. 12 Hitachi, we see the big emphasis. And it 13 shifts where the people doing it are, and 14 particularly Mr. Roth. 15 Mr. Tamoshunas tells us in his deposition 16 that Hitachi, they didn't have a whole heck of a lot 17 to do with it. It was Mr. Roth and it was Mr. 18 Hyatt. At the end of the day when all is said and 19 done, Mr. Roth -- Mr. Hyatt gives Mr. Roth a 20 significant seven-figure bonus. It's -- all of this 21 is coming through California. 22 Hitachi signs onboard on August 6th, 1992, 23 obligating itself to pay Mr. Hyatt $56 million. The 24 contract states it's between Hitachi and Mr. Hyatt. 25 Mr. Hyatt signed it. He said earlier he didn't sign 26 anything in '92, but I'm not saying -- he's just 27 mistaken, it's been a long day. I don't think 28 there's anything malicious there. 34 1 But it's -- it's -- the contract provisions 2 once again include the waiver of pursuit of patent 3 infringement, provides the payments to be made by 4 wire transfer to the client trust account of 5 appellant's Los Angeles lawyer, pertains to, once 6 again, 24 patents, and states that disputes to be 7 resolved according to California law. The agreement 8 does -- it does provide a -- the recital of the Los 9 Angeles Post Office Box as appellant's mailing 10 address, but none of the other significant factors 11 have changed. They're all cookie-cutter to what we 12 saw during 1991. 13 The contract also calls for Hitachi to 14 remit two payments to appellant. The first is due 15 within 30 days in the amount of $31 million. The 16 second, in the amount of 25 million, is due on or 17 before December 28, 1992. 18 The monies are timely paid. However, the 19 way they're divided has changed. Mahr Leonard's 15 20 percent is reduced to seven and a half. And the 21 50/50 split that has been traditionally in place 22 between the appellant and Philips is also altered. 23 Specifically, Mr. Hyatt is awarded an additional 24 $6 million off the top of the first payment, and the 25 Mahr payment -- and the Mahr Leonard payment is to 26 come out of the Philips' share. 27 Similarly, the appellant is awarded an 28 additional $4.2 million off the top of the second or 35 1 the $25 million payment due in December, and again 2 the Mahr Leonard share comes out of Philips. 3 At the risk of oversimplification, it's an 4 addition -- it's an increase of roughly 18 percent 5 of the gross being paid to Mr. Hyatt. 6 The change is memorialized in a document 7 entitled Third Supplemental Agreement between the 8 appellant and Philips. That agreement was drafted 9 and revised by appellant's Los Angeles lawyers. 10 The disbursement -- the disbursements -- 11 when the money comes in -- in fact the first one 12 comes in a little bit early. When it comes in, the 13 monies are disbursed through Mr. Roth in Los 14 Angeles. He sends it off to Philips in New York, 15 and then sends -- sends it off to Mr. Hyatt his 16 share. 17 The same thing with the second half. It 18 comes in, Mr. Roth distributes to both Philips and 19 to -- and to Mr. Hyatt. 20 The -- the contract -- the contract is the 21 result of the patent development activities in 22 California. The wining the dining, the research, 23 the professional services rendered by Mr. Roth and, 24 you know, the specific -- the specific wire transfer 25 into California and subsequent distribution. 26 MS. HARKEY: You don't have to use all your 27 time. You don't have to use all your time if you 28 don't want to. 36 1 MR. HILSON: I want to get into the -- I 2 want to get into the so-called income error. 3 MS. HARKEY: Okay. If you could get into 4 that. 5 MR. HILSON: I thought -- I thought I had 6 it on a foam board, but I don't. 7 MS. HARKEY: That's okay. We'll listen to 8 you. 9 MR. HILSON: Okay. Anyway, the whole -- 10 let's see -- okay. 11 During 1996, FTB's auditor told appellant 12 that FTB had opened an audit for '92 and that the -- 13 that the appellant's federal form 1040 had disclosed 14 that he had received income from Philips, Oki and 15 Hitachi and asked for detailed information, 16 including such things as contract, rental reports 17 and documentation of wire transfers to verify when 18 the payments were received by Mr. Hyatt. 19 What she got in response was a letter 20 setting forth a table which unequivocally stated -- 21 it was a list of Mr. Hyatt's 1992 income from 22 Philips, Oki and Hitachi and the dates of receipt. 23 With respect to the so-called Philips 24 income, none of the underlying contracts with the 25 Japanese corporations were provided. Similarly, 26 nothing was provided with respect to when the 27 Japanese corporations wired their payments or when 28 Philips received the monies paid by the Japanese to 37 1 satisfaction of their contractual obligations. 2 Instead, what they got was a list, 3 including a table which is suppose -- which is 4 represented as sourcing the income. What it does is 5 it goes through dates and it proceeds to associate 6 an aggregate $40 million payment from Hitachi -- 7 excuse me, from Philips on January 15th, 1992, 8 $48.7 million. There is nothing here to indicate 9 that, no, it was 24. It was just what was put over 10 into January. And there's no explanation of any of 11 this. 12 So what happened was the auditor took them 13 at their word and went forward, issues the -- issues 14 the NPA and basically says, hey, we find that you're 15 a resident until April 2nd. You had $48 million of 16 income during January -- maybe a little bit more if 17 you add Oki in and that type of thing -- but this is 18 what you did. You had this, you reported on your 19 federal return that the total was 84, calculated on 20 a mathematic percentage, ran the tax tables, and 21 away we go. 22 Well, that's issued. They're told, hey, 23 this is our determination letter. You've got so 24 much -- you've got so much time if you want to talk 25 about it further. 26 But time elapses. Thirty days later 27 there's, oh, no, wait a minute, you made a mistake. 28 Now we start moving into the protest. 38 1 During the protest, the protest hearing 2 officer looks at all of this and says, hey, wait a 3 minute, everything that's done here is California. 4 You went out -- you're an inventor. You got 5 patents. Once you got the patents, you turned it 6 into a business plan. Once you got the business 7 plan, you tried to commercialize what you had done 8 here. And runs down and basically says, wait a 9 minute, this is California-sourced income. 10 And the amount -- and particularly Hitachi, 11 when she found -- when she found that there was 12 $48- to $52-million of income in January through 13 the -- through the representation made by Mr. 14 Hyatt's representatives and plugged that in to a 15 formula, well, the Hitachi $56 million in and of 16 itself takes care of all of that, particularly if it 17 was the type of thing that you find that it is 18 sourcing. 19 If you find -- if you find that the 20 $24 million that was -- was picked up in 1991, in 21 January of 1991, is all that is sourced to 22 California, then the proposals they make in that 23 letter should be adopted as the adjustment that 24 needs to be made. 25 Obviously, if you find that none of this is 26 sourced to California during 1992, then you find 27 that none of it is sourced to California during 28 1992. 39 1 From there, now I move on to the interest 2 abatement. And, you know, quite frankly, what I 3 would say in terms of the interest abatement and why 4 it's not justified would be the same explanation I 5 gave you with respect to 1991. If you want me to 6 regurgitate it, I will. But I suspect that you can 7 remember what I said even though it was a very long 8 time ago. 9 MS. HARKEY: I think I could. 10 MR. HILSON: And with that, if you've got 11 questions, I'd be happy to answer them. 12 MS. HARKEY: Thank you. 13 Okay, Mr. Hyatt, you have rebuttal. And I 14 think that's it, has rebuttal. And I believe that 15 they've answered the $24 million error, that it's up 16 to us to kind of decide one way or the other. But 17 let's -- let's go on. Let's hear from you. 18 MR. HYATT: Thank you, Your Honor. 19 You have just heard the epitome of a tax 20 attorney trying to explain away the horrible, 21 horrible things that these people did to me. 22 Now let me -- first of all, I'd like to 23 point you to Tab 124, which is the key letter that 24 they're -- that identifies the 1992 licensing 25 income. 26 The, uh -- the key -- let's see. 27 The Hitachi and Oki -- Hitachi income has 28 never been an issue in this case until just now. 40 1 They just brought it up. They never assessed taxes 2 on that income. They never argued it. It never has 3 been an issue and it is not part of the assessments 4 and should be, I believe, totally disregarded by 5 your Board, the Board. 6 Relative to the contacts with Hitachi, I'd 7 like to disclose those later. But I really want to 8 get into the $24 million error and how tax attorneys 9 can manipulate and misrepresent things. 10 The Philips -- the Philips item does have 11 what is called a gross amount. Let's see. The 12 column is -- aggregate amount. And the aggregate 13 amount is detailed by the dates, where the dates 14 have the amounts that were deposited into my 15 accounts, because that's what the auditor wanted, 16 when the wire transfers came in, evidence of the 17 wire transfers. 18 So what we did is we put in the dates of 19 the wire transfers, where -- which investment 20 facility -- organization it was wire-transferred to, 21 and then the -- even though they say all there was a 22 letter and a table, they're absolutely wrong, 23 absolutely wrong. There's a whole package of 24 documents attached to this letter and to this table. 25 Every item in that table -- excuse me, for pushing 26 it. I apologize. 27 Every item in that table has a document 28 attached from the investment organizations where 41 1 I -- because that's what she said she wanted, I 2 asked them to provide it to me and they did. Every 3 one of those investment organizations, JP Morgan, 4 Janus, Fidelity, even the checks paid by Philips are 5 in there. Philips paid me a couple of small checks 6 for their license. 7 Now, so they're all attached. It's exactly 8 what she asked for. The aspect -- it's really an 9 absurd concept that I have to give wire transfer 10 evidence for things that I didn't -- were not 11 wire-transferred to me. These were wire-transferred 12 to my investment organization -- my investment 13 companies. I didn't have the wire transfer 14 information. 15 And they say, well, he didn't give us the 16 wire transfer information. I gave them the best I 17 had. I tried very, very hard. I went through a lot 18 of trouble getting that information that I thought 19 she wanted. We sent it to her, and we never got a 20 complaint, never got a complaint. 21 You hear it today, they are complaining 22 about it. Well, of course. They're tax attorneys 23 trying to explain why they tried to defraud me on 24 $24 million worth of income. 25 They -- this is new to the proceeding. 26 They -- I think they may have thrown it into their 27 second additional briefings. But we provided them a 28 lot of documentation to support this. 42 1 Now let's look at this. Here, January 14th 2 and 15th Philips sent me essentially $23 million, 3 which was my share of the three -- of the NEC, Sony 4 and Sharp licenses which Philips collected the money 5 on in December 1991 and wire-transferred me these 6 three increments because I distributed them to 7 different investment organizations on January 14th 8 and 15th. 9 There is no $24 million included there. 10 It's only the $23 million. The $24 million error is 11 not in there. And I'll tell you where it is because 12 I fully disclosed that to them and it is in here, 13 but it is not in January. It is not in the disputed 14 period. And it is much, much later. 15 But I think that you'll find in the 16 presentation that you've just heard from the tax 17 attorneys, they didn't talk about that. They talked 18 about, well, he got a fax here and he got a letter 19 there and he signed an agreement here. But they 20 never got their arms around the aspect that the 21 $24 million error is the $24 million at the bottom 22 of the table -- 6, 7, 8, 14, 23 -- yeah. 23 The five items at the bottom of the table 24 constitute the $24 million error. It was disclosed 25 to them in January -- in February '92 -- pardon me, 26 '96, with this letter. And it was confirmed by them 27 in their first additional briefing when your Legal 28 Department required them to tell them when this 43 1 money came in. And they did not put it under -- 2 they did not say it came in in January '92. They 3 said it came in on the dates that I have here, 4 except they had minor errors, which we complained 5 about but it wasn't a big thing and we didn't push 6 it. 7 So this table told them exactly what was 8 received. And that $24 million was a made-up story 9 to try and -- I believe, and please excuse me for 10 saying this -- to try and extort me -- extort a 11 settlement, coerce a settlement from me. 12 And they didn't -- they never said the 13 documents you sent us in support of this are 14 insufficient. They never said that. They didn't 15 want to know about it. They liked the numbers. 16 They liked the numbers because they were large. 17 They probably understood very well they'd never get 18 away with it. I'm sure this Board will not let them 19 get away with that. 20 But they -- they didn't want to know the 21 truth. They -- they had the truth in front of them. 22 They disregarded it and now they're making up silly 23 stories. 24 Well, let's cut back to the chase, if you 25 excuse the expression. 26 Could you remove this, please? 27 MR. HILSON: Sure. 28 MR. HYATT: Or may I use it? 44 1 MR. HILSON: You may use it. I'll get this 2 out of your way and you may use that. 3 Is that sturdy enough for you? 4 MR. HYATT: That's fine. 5 MR. HILSON: Okay. 6 MR. HYATT: Here's the disputed period. 7 MS. HARKEY: Get your microphone, sir. 8 MR. HILSON: They want you to use the mic. 9 MR. HYATT: Thank you for reminding me. 10 Here's the -- in this timeline from 1990 11 through the end of '92, the start of the disputed 12 period in September '91, the end of the disputed 13 period in April 3rd, 1992 when I moved into my house 14 and they said that's -- that's when I intended to 15 move, which is, I think, absurd. I intended to move 16 prior, but you've already decided that. 17 So the end of the disputed period. And 18 what do you see at the end of the disputed period? 19 Well, you see in July 31st, all '92, Philips 20 distributed Sanyo licensing payment, which is 21 exactly what is on this 1996 table. 22 Let's see, that was July 31st. 23 Okay. Here we have -- ah, that's 24 surprising -- July 31st. And how much came in? 25 Well, $15 million. 26 MS. HARKEY: $15 million. 27 MR. HYATT: And then October 5th, October 28 5th is the Omron licensing income. Well -- and 45 1 that's what they admitted to in their additional 2 briefing. Well, there it is, October 5th it was 3 deposited into Benron -- Benham and it was a small 4 amount, 685,000, relatively small. And then, oh, my 5 gosh, there's another one, a big one to Fidelity. 6 Well, here, December 29th, Columbia and Kenwood, two 7 license agreements, and Philips distributed those 8 and those were to -- both went into Fidelity, and 9 that was a total of 6 million and some additional 10 money. 11 It's all there. It's all there -- 12 MS. HARKEY: Let me just -- let me just say 13 that we see the 9 million and the 6 million, the 14 2.835, the 685,000, the 6.1. That totals about 15 $24 million, and that is the error, right? 16 MR. HYATT: That is correct. 17 MS. HARKEY: Okay. Let me wrap that up. 18 So then the other ones that are actually 19 your income that is being debated here is the 2/3/92 20 Oki for 4 million; the 1/15/92 for Philips, which is 21 10 million; the 1/14/92 for Philips, again 5 22 million; and then there's a 4 million; there's a 23 4.866 million; and then on 2/12/92 there's finally 24 52 million. 25 MS. MA: 52,000. 26 MS. HARKEY: What was that? 27 MS. MA: 52,000. 28 MS. HARKEY: 52,000. 46 1 So that's the total of roughly, what, 27, 2 28. 3 MS. MA: 27,919,236. 4 MS. HARKEY: 27,919 -- 5 MS. MA: 326. 6 MS. HARKEY: -- 326. 7 Okay. So that is the disputed amount. The 8 24 million is not disputed because it's in '92, 9 after -- after April 3rd. 10 So FTB, the 24 million, why is it still on 11 the NPA? 12 MR. HILSON: Well, as I explained, the -- 13 when it went into the NPA, it was done under a 14 sourcing analysis in what the auditor called the 15 adoption of the California method. 16 What she did was she understood this letter 17 to represent that there was $48 million received 18 from Philips. 19 MS. HARKEY: Okay. So can we agree that 20 that was probably an error since your appeal is 21 ninety -- is 4/3 -- yeah, 4/3 -- I'm getting 22 confused. 4/3/92? 23 MR. HILSON: No. What happened was the 24 protest hearing officer, at the conclusion of the 25 protest, ruled, made the determination that the 1992 26 income in its entirety was California-sourced. 27 MS. HARKEY: Okay. Okay. Well, that -- 28 that seems to be beyond our case here, does it not? 47 1 You have 1992, and I believe the -- the time frame 2 that you cut off for the appeal was the date that he 3 bought the house in. -- 4 MR. HILSON: That was for the residency 5 argument, not for the sourcing. 6 MS. HARKEY: Not for the sourcing. 7 MR. HILSON: Not for the sourcing. 8 MS. HARKEY: Okay. Well then, pardon me. 9 Continue on. I'm sorry. 10 MR. HYATT: You hear a, um -- a tax 11 attorney telling stories about how, in retrospect, 12 he can explain away what I consider to be a major 13 fraudulent activity by the FTB. 14 He himself today said that the, uh -- um -- 15 the correspondence by Philips to the California 16 addresses tapered off significantly, or however he 17 said it, after April 3rd. 18 I would hope this Board would not only make 19 note of their -- what I consider to be an 20 intentional error in order to, as the auditor is, 21 um -- has established that the auditor said she's 22 out to get me, quote unquote, and that was what they 23 called a vendetta attitude of audits -- auditors. 24 So I would hope that your Board will, in 25 addition to hearing my -- my sourcing discussion 26 relative to the income that came in during the 1992 27 disputed period, will also -- will disregard and 28 deny taxes on the post disputed period income, which 48 1 is the $24 million error. 2 I also would like to say that they never 3 audited, they never protested, they never even 4 admitted or acknowledged or thought about the post 5 disputed period. They cut everything off at April 6 3rd, the end of the disputed period. And now that 7 they were forced to transfer $24 million error into 8 the post disputed period, we have the epitome of 9 a -- of a false tax assessment where they are 10 assessing taxes on income that they never addressed 11 during the audits or the protest and not for the, 12 um -- all of the briefings in the -- before the 13 Board. 14 It was first brought up and this money was 15 first taxed, if I could put it that way, in the, 16 um -- uh -- in the post disputed period in the 17 additional briefing; that was approximately 2014 or 18 there -- 2013 or so. 19 And now they're trying to cure their error, 20 explain their error away so they can still tax me on 21 what the -- what the, um -- the, uh, record shows 22 that was -- it was residency income in January 1992, 23 during the disputed period. It was not sourcing 24 income in the post disputed period in 1992. Which I 25 would repeat, they never did an audit, never did a 26 protest, never argued those issues, and now they're 27 assessing me taxes on penalties, incidentally, which 28 your Board graciously disposed of. 49 1 They're tax -- they're assessing me taxes 2 and -- and fraud penalties on, um -- on income that 3 they never, never, never addressed in the, um -- in 4 the whole -- in 20 years -- almost 20 years of that 5 process. And that is very unfair, and I submit I 6 expect it's very much illegal and I suspect the 7 Board will not condone such treatment. 8 MR. RUNNER: Madam Chair? 9 MR. HYATT: What I would like to do is to 10 spend a little time rebutting the other income for 11 the disputed -- the comments that were made relative 12 to the disputed -- the '92 disputed period. 13 MS. HARKEY: Uh, yeah. Let me -- let me go 14 to Member Runner. He wants to get something in 15 here. I'm not sure what. 16 MR. RUNNER: Yeah. Let me just, again, 17 I -- I think -- I think we're hearing a lot of the 18 same stuff over and over again, quite frankly. And 19 I think we'd like to get to the questions that we 20 have, to clarify. And maybe as we ask those 21 questions, you could bring out to points to which 22 you are still needing to talk about. Because I 23 don't want to lose any issues that are before us as 24 we keep kind of going down the path. 25 So, you know, I don't want to cut you off 26 in your rebuttal, but I just -- 27 MR. HYATT: Yes, Your Honor. May I be 28 permitted to go through the high points, their 50 1 misrepresentations in my rebuttal? And I will try 2 and cut out a lot of these things that aren't as 3 important. 4 MS. HARKEY: Please, go ahead. 5 MR. RUNNER: Okay, thank you. 6 MR. HYATT: I will try and do this quickly. 7 I think that it's disingenuous for them to 8 keep saying that I told the recipients that I could 9 be contacted through the California addresses. I 10 didn't. 11 I used, in a lot of these respects, old, 12 um -- um, form letters and such with headings on 13 them, and I never said I could be contacted there. 14 They were just old return addresses in those 15 documents. These people all knew I had moved to Las 16 Vegas; I had notified them to that effect. 17 Relative to the bill by Gregory Roth, 18 Pretty Schroeder Law Firm was doing additional work 19 on what was called re-examinations. They originally 20 billed me for them. Philips eventually, shortly 21 took over responsibility and they billed Philips for 22 it. But these were not for licensing activities. 23 These were for patent office re-examination 24 activities. 25 The letter to Toshiba, and there was a 26 letter to Oki I believe, Philips needed that to tell 27 them that they had, um, exclusive licensing 28 authority. Phillips created those letters. When 51 1 they said they needed my letterhead stationery, they 2 meant the ones that they had. I didn't have any 3 letterhead stationery like that. That was something 4 Philips created, and I signed it at their suggestion 5 so that they could -- and they did it in later 6 years -- license Toshiba. And they, um -- and that 7 other company. 8 Relative to the California account that 9 they keep talking about or California accounts, 10 these were investment accounts. These were not bank 11 accounts. Investment accounts have a -- had my 12 Nevada situs. And what happened is I was -- yeah, I 13 paid -- I wrote drafts on these, a few drafts, not 14 many. And I, um -- I was emptying those accounts in 15 favor of the other ones, not because I had any 16 concern for them being California contacts, but 17 because my investment advisor could not work with 18 those, um, investment accounts and he wanted me to 19 put them in the other ones that he had here, 20 Fidelity, Benham, Federated and the like. 21 So those were not California banking 22 arrangements. Those were emptying the California 23 accounts because my investment advisor wasn't -- 24 didn't like them. 25 The press release, one thing the, um -- 26 the, uh -- that was brought up in this, um -- um -- 27 as being, um, California contact. No, absolutely 28 not. That February press release expressly said 52 1 Mr. Hyatt resides in Las Vegas. It's very 2 interesting that you're not told that. That's very 3 important information. And I think that holding 4 back important information like that is just as bad 5 as making false statements. 6 There's a comment that Philips' quarterly 7 reports with 80 million income, reciting 80 million 8 income for the fourth quarter of 1991. Well, first 9 of all, Philips had to generate quarterly reports 10 for me. That was part of their responsibility as 11 the licensing entity and I was the inventor. 12 But what happened there is, again, they 13 misaddressed that report. And I believe what 14 happened -- that quarterly report. And I believe 15 what happened, if you look at the file, and I'd have 16 to verify this, that they replaced it with a second 17 quarterly report for that period with my correct 18 address in there, my correct Nevada address. 19 Fedexes, they said signed by Gil Hyatt. 20 There's a lot of evidence in the record that says 21 that that is false. First of all, we have the Fedex 22 testimony that -- in an affidavit that says that 23 they, um -- that the, um -- putting a name in that 24 signed box does not mean that it was actually signed 25 by the person who was in there. That was the person 26 who it was addressed to. 27 And in a particular case which would we 28 briefed very well, here's a Fedex, uh, statement 53 1 that they say shows that I was present at Jennifer 2 Circle when in fact it says "Miss Smith." I forget 3 her first name, but it's got her name in the signed 4 box. Well, she worked for Philips in New York. She 5 was not at Jennifer Circle to receive a Fedex 6 package that was addressed to me. She was not. 7 Elise Smith was her name, Elise Smith. 8 This has been well briefed. But the -- and 9 the FTB knows it very, very well, that these signed 10 boxes in the Fedex, uh, deliveries were not -- did 11 not mean that they were actually signed by the 12 individual that they typed in there. It was usually 13 the person it was addressed to. 14 Relative to the Denver to Las Vegas 15 business trip, it's interesting that they should 16 mention that. In the briefings they called that a 17 ski trip, and we said that's ridiculous. I didn't 18 go to Denver and go on a ski strip within a couple 19 of weeks of getting out of major -- hospital for 20 major cancer surgery. I did not. I did not. 21 There is a document that indicates a Denver 22 to LAX flight, but I did not go to Denver while I 23 was recover -- on a ski trip, which they claimed, 24 when I was recovering from cancer surgery. 25 Twelve-hour meeting with Mr. Roth, Mr. Roth 26 filed in his declaration, said no, 12 hours was the 27 amount of time he spent that day and billed Philips 28 for. It is not -- and he gave he list of things he 54 1 did -- it is not 12 hours for a meeting with 2 Mr. Hyatt. The meeting with Mr. Hyatt -- 3 MS. HARKEY: I think we understand that 4 those meetings are not with you. They're on a golf 5 course. There are a variety of activities included 6 in that with -- with the, uh -- with the company. 7 So I think we're okay on that. 8 MR. HYATT: Thank you, Your Honor. 9 Signed the Hitachi agreement, yes, Philips 10 wanted me to sign the Hitachi agreement. It has my 11 California address on it. And it, um -- and I 12 remember a specific discussion where Hitachi did not 13 want to negotiate with Philips because they had a 14 cross-license with them. So Philips got Pretty 15 Schroeder, the law firm with Greg Roth, and they got 16 Mahr Leonard to do the negotiation so that Hitachi 17 would be more comfortable with that. 18 Relative to the different -- different 19 payments, what happened is Hitachi did something 20 very different. Hitachi, in addition to saying they 21 didn't -- they would prefer not to negotiate with 22 Philips, they also said they wanted a license on all 23 of my patents because Philips only had 23 of my 24 patents and the 24th one which I threw in. 25 So Hitachi agreed to pay a small amount of 26 extra for the rest of my patents, which I threw in 27 in order to -- because Philips wanted to close that 28 agreement. 55 1 Yes, the Hitachi agreement has my p.o. box 2 in Las Vegas as the -- in the preamble. 3 MS. HARKEY: Right. 4 MR. HYATT: So anyway, there's nothing 5 suspicious about Hitachi paying extra money for more 6 of my -- for license for more of my patents than 7 Philips had a right to license them, and I threw 8 them in in order to help Philips close the deal. 9 MS. HARKEY: Okay. I'm going to bring this 10 back to questions from the Board because I think -- 11 I think everybody's got a lot of information and 12 we're -- I think, you know, minus a few little 13 questions, we kind of know where we are. 14 Member Runner? 15 MR. RUNNER: Thank you. Yeah, just a 16 couple quick questions. 17 I am confused a bit in regards to what is 18 the amount, the income that was -- the NOA was based 19 on. Maybe go to Appeals. 20 What is the amount that the NOA was based 21 on? 22 MR. THOMPSON: Yes. So the NOA amount was 23 calculated -- excuse me -- was calculated based on 24 the numbers submitted by appellant in 1996, in that 25 Cohan chart, right? And it approximates 26 $51 million. 27 MR. RUNNER: Okay. 28 MR. THOMPSON: And that's from the 56 1 approximately 48.7 million that FTB read the chart 2 as being received on January 15th, which was not 3 received on January 15th. 4 MR. RUNNER: Okay. 5 MR. THOMPSON: And adding to that, the 6 2.9 million that FTB read the chart as being 7 received on February 3rd, but was not in fact 8 received on February 3rd. 9 MR. RUNNER: Okay. So that was the amount 10 in the NOA. 11 MR. THOMPSON: Correct. 12 MR. RUNNER: Okay. 13 Let me go, real quick, to FTB then. I'm 14 confused in regards to what you, right now, are 15 arguing is the amount. 16 MR. HILSON: Same thing that the protest 17 officer -- hearing officer said. 18 MR. RUNNER: 51 million? 19 MR. HILSON: The -- that -- yes. 20 MR. RUNNER: Okay. 21 MR. HILSON: Yes. 22 MR. RUNNER: $51 million of income. 23 MR. HILSON: Yes. 24 MR. RUNNER: Okay. 25 MR. HILSON: And may I explain? 26 MR. RUNNER: If it's more? I mean, you can 27 explain, I guess, if it's -- if it needs 28 explanation. 57 1 MR. HILSON: I'll leave it. 2 MR. RUNNER: Okay. Because, again, what's 3 confusing me is I show an income that it seems to me 4 I'm totaling here in regards to what's shown here is 5 like $84 million. So -- 6 MR. HILSON: Okay. Now I need to explain 7 it. 8 MR. RUNNER: Thank you. 9 MR. HILSON: Okay. What the protest 10 hearing officer did was find that the entire 11 $84 million reported on Mr. Hyatt's 1040 for 1992 12 was California-sourced income. 13 MR. RUNNER: Right. Okay. 14 MR. HILSON: Okay. And basically said by 15 virtue of the fact that taking all of the -- deeming 16 all of this California-sourced income cures the 17 $24 million error because it's more than what the 18 auditor had concluded at the $48 million figure. 19 But, because we can't go beyond the original 20 assessment, we're sustaining the original 21 assessment. 22 MR. RUNNER: Okay. So you -- again, just 23 so that I'm clear here, so what you have 24 identified -- what you're saying is that you're 25 dealing with the $51 million issue even though, 26 based upon a calculation of California -- if you go 27 with the argument of California source income, it 28 would be approximately $84 million. 58 1 MR. HILSON: Correct. 2 MR. RUNNER: But because that was not in 3 the NOA, that amount, what's being argued right now 4 is just the tax that's due on the -- on the 5 51 million. 6 MR. HILSON: Correct. 7 MR. RUNNER: Correct? 8 MR. HILSON: Yes. 9 MR. RUNNER: Okay. I just wanted to 10 clarify that at that point. 11 So we're basically just basically using the 12 amount, I guess, that's based upon your residency 13 Argument. 14 MR. RUNNER: Yes, it's the same number. 15 MR. HILSON: Okay. It's the same number. 16 Okay. That's what I kind of wanted to work 17 through, you know, at that point. Because, again, 18 the thing that was interesting to me -- and then I 19 guess it makes sense because we don't have to really 20 discuss then the payments that were received by the 21 taxpayer from -- from, uh -- from April 4th because 22 right now he was -- you are not assessing him for 23 those -- for those payments, correct, for after 24 April 4th? 25 MR. HILSON: Well, that's not entirely 26 correct. 27 MR. RUNNER: Okay. Well, help me -- help 28 me get correct then. 59 1 MR. HILSON: What -- 2 MR. RUNNER: Help me get correct. 3 MR. HILSON: -- essentially what we're 4 saying is, particularly in light of the 5 determination that there's no residency, right, that 6 the tax assessment that went out, assuming 7 residency, was based upon a $48 million -- or 8 $51 million of income. 9 MR. RUNNER: Yeah. 10 MR. HILSON: What we're saying is the 11 $24 million or so that was released on January 14th, 12 the payments that came in in late December, the 13 4 million in Oki, and the Hitachi, when combined, 14 are sufficient, if you -- if you -- if you look at 15 it all as California-sourced income, it is more than 16 sufficient to sustain the number that was originally 17 based upon the residency conclusion. 18 MR. RUNNER: Okay. I guess the point that 19 I'm wanting to get through here and understand is 20 that you are not increasing the amount -- 21 MR. HILSON: No, not at all. 22 MR. RUNNER: -- based upon the argument of 23 residency. 24 MR. THOMPSON: Or sourcing. 25 MR. RUNNER: I mean, excuse me, on 26 sourcing. 27 MR. HILSON: Thank you. 28 MR. RUNNER: Thank you. Is that what I 60 1 would understand that correctly? 2 MR. HILSON: Yes, I think we finally got 3 there. 4 MR. RUNNER: I assume that is why that in 5 your -- in your documentation here that you provided 6 you basically end your -- your -- your -- your 7 documentation here with March, because you were 8 basically making the residency argument, not the 9 sourcing argument. 10 MR. HILSON: Quite frankly, Mr. Runner, I 11 ran out of time. The presentation was originally 12 going to be a different -- 13 MR. RUNNER: You have charts for the rest 14 of the year with you? 15 MR. HILSON: I stopped there, but I had -- 16 I had additional -- I cut it out of the 17 presentation. 18 MR. RUNNER: You have the charts here for 19 the rest of the year? 20 MR. HILSON: No. No. What I said -- 21 MR. RUNNER: Oh, okay. In preparation -- 22 MR. HILSON: In preparation, I ran out of 23 time. Because there were additional instances of 24 continued California contacts beyond March, but to 25 get it done we -- 26 MR. RUNNER: Okay. Let me ask then one 27 last question back to, um -- to Appeals. And that 28 is -- and I think this is the same question that we 61 1 actually had that Mr. Leonard brought up in the last 2 discussion. I just want to see if this is the case 3 in this particular case. 4 Did the NOA that was issued in 1992 also 5 include the issue of sourcing? 6 MR. THOMPSON: Yes. 7 MR. RUNNER: Okay, thank you. 8 MS. HARKEY: Member Ma. 9 MS. MA: Okay. So I see that the taxpayer 10 or Reardon and McKenzie submitted this document that 11 allocates all of the payments in 1992 by date. 12 And what the Franchise Tax Board did in 13 their letter dated April 1st, 1996 is they basically 14 just used those numbers on page 16, Schedule C 15 income, Philips was the 48.7, Oki was the 16 2.9 million, and the Hitachi was the 32 million 900. 17 And you just used the exact -- they tied, you know, 18 exactly. $84,671, 280 and 62 cents. 19 MR. HILSON: Correct. 20 MS. MA: Right? 21 MR. HILSON: Yes. 22 MS. MA: But -- but if, as your letter 23 says, since we determine that Mr. Hyatt is domiciled 24 in and a resident of California until April 3rd, 25 1992, the income received prior to April 3rd, 1992 26 is taxable to California. 27 So why wouldn't you break out just the 28 amounts that -- since he's a cash basis taxpayer, 62 1 just the amounts that he received? Namely the 2 $4 million from Oki on April 3rd; Philips he 3 received -- one, two, three, four -- five payments 4 on January 15th, January 14th and February 12th, 5 totaling 23 million 900, therefore, if you add up 6 all of the income he received prior to April 3rd, 7 1992, which is when we say he became a Nevada 8 resident, therefore the business situs has changed 9 and he's no longer -- you know, he's now moved to 10 Nevada, moved everything to Nevada, why wouldn't the 11 taxable amount be $27 million 919,326? 12 MR. HILSON: Well, the letter didn't 13 itemize what came in from Philips when. 14 MS. MA: I get it. But you used the same 15 amount. 16 MR. HILSON: Correct. 17 MS. MA: So you pulled off the amounts, 18 just pulled off the sums for those three aggregate, 19 Hitachi, Oki and Philips, even though it's wrong 20 because there's payments out. So the aggregate 21 amount is actually a net amount and not a gross 22 amount. But the auditor just pulled those out and 23 just put it in your letter and your Schedule even 24 though it's wrong, it's off. 25 MS. YEE: Madam Chair? 26 MS. HARKEY: Yes. 27 MS. YEE: Can I take a shot at that? 28 MS. MA: All right. Go ahead. 63 1 MS. YEE: I think we're conflating sourcing 2 and residency. 3 MS. HARKEY: Exactly. 4 MS. YEE: Because, I mean, when I look at 5 the sourcing issue for '92, the April 3rd date to me 6 is irrelevant if the business practice stayed the 7 same in '92. 8 So you still had a business situs in 9 California, and there's nothing that demonstrates 10 that any business facilities were set up in Nevada. 11 I mean the whole practice stayed the same. 12 This list looks exactly the same as what we 13 got for '91 in terms of lawyers involved and 14 communications to locations in California. 15 And so I -- I -- I mean the way I kind of 16 look at it is that residency is totally separate and 17 apart if in fact there wasn't any change in the 18 business practice of where now the business is 19 totally operating in Nevada. And I don't think he 20 even took out a business license in Nevada until the 21 end of 1992. 22 MS. HARKEY: He didn't have a business. 23 MS. YEE: So in other words, there still 24 was licensing -- licensing business just continued, 25 I mean just continued as it had been. But I don't 26 think the residency should affect that because the 27 business situs remained the same. 28 MS. MA: But then it should really be the 64 1 84 million plus, you know, these payments out on 2 that chart, right? I mean it should be another -- 3 MR. HILSON: Correct. 4 MS. YEE: Yeah. I mean -- yeah. 5 MS. MA: Ninety-six -- it should be like 6 96 million. 7 MR. HILSON: But that's in excess of the 8 NPA. 9 MS. YEE: Yeah. You can't go -- you can't 10 exceed. 11 MR. HILSON: We couldn't exceed the NPA. 12 MS. MA: Oh. 13 MS. HARKEY: I have -- I have an issue 14 here. The NOA is through 4/2 of '92, so I don't 15 think you can add to it after that. 16 And I do believe the clear sourcing rule 17 should apply. Income flowing from intangible 18 source, which this is because there were -- the last 19 time the big debate up here, the reason we split was 20 because he was signing, faxing, getting stuff back. 21 This time we're dealing with the domicile of its 22 owner. And business situs exception should not 23 apply. 24 The FTB admits for purposes of sourcing 25 that Hyatt was a Nevada resident after October of 26 1991 -- 27 Oh, no, okay. 28 The income resulting from his intellectual 65 1 property patents after he moved to Nevada is taxable 2 in Nevada, not California. 3 It's not like a contract. It's not like -- 4 it's not like a contract, an installment contract 5 because the installment contract that he would have 6 signed, the income would have been guaranteed, a 7 promise to pay. 8 In this case there were no guarantees. In 9 fact we heard that Philips had told him that he 10 probably wouldn't be getting income for a long, long 11 time. The fact that it started coming in does not 12 change the fact of the contract that he had. That 13 was not an installment contract, so it can't be 14 related to that. It can't be compared with that. 15 These were licensing agreements that were supposed 16 to mature a lot later or were supposed to start -- 17 come to fruition later, that happened to come 18 into -- happened to start being paid upon early. 19 And if the FTB -- we -- we already decided 20 that residency, he established residency in 1991. I 21 know there was a dissent to that, but 1991, October 22 of 1991. 23 The fact that he considered -- he continued 24 to receive royalties does not mean that that's 25 California-sourced income because these are not 26 installment contracts. These are, you know, 27 licensing agreements. 28 I do not agree that he had a business or 66 1 even had to establish a business in Nevada, business 2 license or business, because he was actually -- he's 3 an inventor. He was not in the business of 4 licensing. He contracted that out. The fact that 5 he had to sign for things is apparent and obvious, 6 but he's not in the business of doing that. And 7 that's why he contracted it out. 8 So I don't -- I cannot understand how all 9 these numbers come in after the NOA. I know what 10 we're trying to do is to say -- or what the FTB is 11 trying to do is say that anything that happened on 12 any of these contracts would be California-sourced. 13 But I don't think we can go there with this because 14 this is not an installment contract. And in fact 15 he -- we have defined that he moved. Even the FTB 16 stated that as of, what, April -- no, March -- as of 17 the end of March he was -- he was then a Nevada 18 resident. 19 So I just don't think we can keep doing 20 this. This is like adding insult to injury here. 21 And so I would like us to at least establish a firm 22 cutoff, and then not keep saying that it's 23 California-sourced income. Because it's -- it's -- 24 Cal -- intangible source is taxable in the domicile 25 of its owner, and that's what this was. 26 This was not a business operation. You may 27 have defined it as such in '91, but it's not a 28 business operation in '92 when he relocated. And he 67 1 did not -- he was not in the business of licensing 2 his patents. 3 Thank you. 4 Is there anyone else? 5 MR. RUNNER: I have a quick question. 6 MS. HARKEY: Yes. 7 MR. RUNNER: This will be really quick. Do 8 we -- do we know when it is that you -- that you -- 9 somebody made mention of a Nevada business 10 license. 11 MR. HYATT: Yes. 12 MR. RUNNER: When did you take out a Nevada 13 business license? 14 MR. HYATT: I believe it was near the end 15 of 1992 when Mr. Kern thought that I should do one 16 just for appearances sake. I never really used it. 17 I didn't need a business license, but on the advice 18 of my CPA I took it out. 19 MR. RUNNER: Was it -- I have a payment 20 from Philips here at 12/29/1992. Did you receive 21 that payment after you opened up a California bus -- 22 or a Nevada business license? 23 MR. HYATT: Probably. My best guess is I 24 got the business license in November '92 -- is that 25 correct -- or thereabouts. 26 MR. RUNNER: Okay. That's kind of 27 interesting to me in regards to -- I mean, again, 28 I -- I don't think any of the sourcing belongs in 68 1 there. But it is interesting to me that indeed he 2 actually, for at least part of it, he had a Nevada 3 business license, which would -- 4 Well, maybe I can go back to -- what other 5 activity in December did we find that he was doing 6 that indicated to FTB that he was doing business in 7 California? 8 MR. HILSON: Hang on a second. 9 Primarily just the disbursement of the 10 monies. 11 MR. RUNNER: Okay. What does that mean 12 "disbursing of monies"? 13 MS. HARKEY: Just checks. 14 MR. RUNNER: Checks that what? What to 15 him? 16 MR. HILSON: Well, there are -- let's see 17 on the 21st -- 18 MR. RUNNER: Uh-huh. 19 MR. HILSON: -- there's a negotiation 20 session with Clarion in Southern California. On 21 the -- the 22nd, Kenwood signs its agreement. On 22 the -- 23 MR. RUNNER: What agreement was signed in 24 California? 25 MR. HILSON: I honestly don't know where it 26 was signed, sir. 27 MR. RUNNER: Do we -- well if he -- 28 MR. HILSON: I would assume -- 69 1 MR. RUNNER: He had a business license in 2 Nevada, and he signed it in Nevada, that sounds like 3 a Nevada business. 4 MR. HILSON: Kenwood's in Japan, and Mr. 5 Hyatt didn't sign the Kenwood contract. 6 MR. RUNNER: Okay. Okay. 7 MR. HILSON: That would've been Philips. 8 MR. RUNNER: Okay. Okay. 9 MR. HILSON: On the -- on the 27th we see 10 Mr. Hyatt approving a legal bill on behalf of 11 Mr. Roth. 12 MR. RUNNER: Do we know where he was when 13 he signed -- when he approved that? 14 MR. HILSON: Do not know. 15 MR. RUNNER: So if he had a Nevada business 16 license and he approved that in Nevada, why would 17 that be California-sourced income? 18 MR. HILSON: Because it's a continuation 19 and a consummation of activities in California. 20 These contracts were consummated in California, 21 particularly Hitachi. 22 MR. RUNNER: So, again, let me just see. 23 So -- so, I guess the argument, maybe I'm missing 24 it, but the argument is since the -- since anything 25 that was -- I guess the argument that we're making 26 right now then is that any -- any income that came 27 from contracts that were signed -- well, again, we 28 don't even know if they're signed in California, 70 1 right? 2 MR. HILSON: Correct. 3 MR. RUNNER: So -- so, again, why -- 4 MS. MA: What's consummated? 5 MR. RUNNER: Yeah, what's consummated mean? 6 MR. HILSON: Well, the con -- the contracts 7 were the result of Mr. Roth's -- particularly 8 focusing on Hitachi, there was the result of all of 9 Mr. Roth's efforts and -- and all of that came out 10 of California, the development and the nurturing of 11 that contract. 12 MR. RUNNER: So why couldn't -- you mean he 13 couldn't be a businessman doing business in Nevada, 14 have an attorney in California? 15 MR. HILSON: If that's all there is to it. 16 But all of the negotiations, the workup, the wining, 17 the dining, all of that's going on in California. 18 It's not just simply a retention of a lawyer in 19 California. It's the work to get the contract in 20 and, most importantly, to bring the money in. 21 MR. RUNNER: So again, so the argument 22 that's being made, just so I get clear, is because 23 there was negotiations, because there was a contract 24 signed somewhere, but there were meetings in 25 California, that there's nothing that I guess the 26 taxpayer could have done that would have moved his 27 business to Nevada. 28 MR. HILSON: Sure. You could have done it 71 1 all somewhere else other than California. 2 MR. RUNNER: Well no, what if he -- what if 3 he moved halfway through? 4 There's -- no, my point would be there's 5 nothing he could have done under that scenario to 6 move his business to Nevada. 7 MR. HILSON: Other than to up the business 8 and the manner in which it is being facilitated so 9 that the California contact and the California situs 10 associated with that business is severed. 11 MR. RUNNER: Well, how do you sever past 12 tense items that were -- you know, so you have a 13 business and you -- and part of your business -- you 14 started your business -- I'm going to make the 15 business situs argument for a moment. 16 If you kept your business and you're 17 making, doing your business in California, you're 18 having meetings and you're doing all those things. 19 And -- and -- and then all of a sudden you move your 20 business license and do business in Nevada, because 21 you had meetings in California, there's nothing you 22 could do to escape the California tax? 23 MR. HILSON: For the -- for the prior 24 activity? 25 MR. RUNNER: For the pri -- 26 MR. HILSON: That is -- that is beyond the 27 stage of just beginning and starting something new. 28 Taking out a business license in Nevada is certainly 72 1 an indication of an intent to sever the business 2 relationship from California -- 3 MR. RUNNER: Right. 4 MR. HILSON: -- and start a new one to 5 start doing something. But if what we're talking 6 about is -- 7 MR. RUNNER: Any revenues or any income 8 that came in prior to that new -- 9 You would assume that any bus -- the only 10 thing that would count would be income that came in, 11 new income that would come in with new contracts, 12 new -- anything that was a -- that was a -- a -- 13 related to the existing contracts could never be 14 Nevada income. 15 MR. HILSON: Not under these circumstances 16 where everything to get them in play and get them to 17 a point where they're an account receivable is done 18 in California. 19 MR. RUNNER: Well, were they account 20 receivables or were they -- 21 MR. HILSON: By -- by the -- by August, all 22 that's left with Hitachi is to wait for the 23 payment. 24 MR. RUNNER: So these were accounts 25 receivable; you knew what the amounts were that were 26 going to be coming in on those dates? 27 MR. HYATT: No, sir. May I comment? 28 There's misinformation being presented here. 73 1 First of all, Mr. Roth was not my attorney. 2 He was working for the Pretty Schroeder Law Firm 3 that was engaged by Philips. Philips specifically 4 engaged him and -- and Mahr Leonard to negotiate 5 with Hitachi because Philips -- because Hitachi and 6 Philips did not want to work together for 7 appearances purposes. 8 So both Mahr Leonard and Pretty Schroeder 9 billed Philips for that work, and Philips paid 10 directly to them. They were not my attorneys. They 11 were engaged by and paid by Philips. 12 In addition, the, um -- though some work 13 went on in California between Mr. Roth, Mahr Leonard 14 and Hitachi, I was not involved in that. I didn't 15 get involved until Philips wanted me to sign the 16 Hitachi agreement because of that appearance aspect. 17 And that was done in Texas. They went to a, um -- a 18 special, really nice place. They -- and they had a 19 signing, and I was -- I was part of that. 20 So it wasn't -- even though there's a lot 21 of talk about California, it's misinformation 22 because where Philips's attorneys negotiated the 23 Hitachi license is not on my head, and I did not go 24 to California to sign that agreement. I went to 25 Texas, and I did so as a courtesy to Philips. 26 MR. RUNNER: Okay. I just fear that 27 there's such an aggressive attempt here to find what 28 California source income is when -- especially when 74 1 there's the issue of contracts are engaged and the 2 contract revenues, or as a result of contract 3 revenue, income is coming even though somebody has a 4 business in other state is just a slippery slope for 5 aggressive tax collection for people who actually 6 are choosing to choose to move their business out of 7 California. Because I don't know where you'd draw 8 that line based upon the logic that was just given. 9 Thank you. 10 MS. HARKEY: Any more comments? 11 MR. HORTON: Yeah. 12 MS. HARKEY: Member Horton. 13 MR. HORTON: Thank you, Madam Chair. 14 First, I'd like to, just for a point of 15 clarification, ask Appeals a question relative to 16 the NPA and the increase of the assessment 17 subsequent to the issuance of the NPA, and does that 18 also pertain to the assessments related to the items 19 in question? 20 So, in this case there are several 21 different contracts that a dollar value is assigned 22 to. Does that dollar value have to stay consistent 23 as well, or can we just take the aggregate total and 24 say okay, it's -- 54 million is there but it's made 25 up of whole different factors? 26 MR. THOMPSON: You are limited to the 27 amount in the NOA. I think you're free to look at 28 other evidence even if it's after April 3rd, 75 1 however, it might be a shift in the burden of 2 proof. 3 MS. HARKEY: Definitely. 4 MR. HORTON: Yeah, it is. 5 That's kind of where I was going. 6 Question of the appellant. I just feel 7 compelled to ask this question, and you really don't 8 have to answer it. I just want to ask. 9 Is there a strategy in the representatives 10 not -- 11 MS. YEE: Speaking? 12 MS. HARKEY: Not talking. 13 MR. HORTON: -- helping to guide this 14 discussion? 15 I mean -- I want to provide some questions 16 that kind of guides this, but at the same time I 17 don't necessarily want to -- I don't want to lead 18 anyone in any one direction. That's not necessarily 19 my role up here, but -- 20 Anyway, you don't have to answer it. Let 21 me move on. 22 MR. HYATT: Your Honor, I'm -- I'm an open 23 book for you. Please ask what you will. 24 MR. HORTON: No, I'll leave it alone. 25 Is there any -- on the sourcing issue, 26 business situs issue, is there any contemporaneous 27 evidence that negotiations took place, subsequent 28 negotiations, negotiations subsequent to the 76 1 activity that occurred in 1991 that took place 2 outside of California? 3 And let me qualify that by saying that I 4 view taxation as a double-edged sword. And so if 5 the sword was to cut the other way where you had -- 6 where you had activities, golfing activities in 7 Texas somewhere, but you had a business situs in 8 California, physical business situs in California, 9 that in and of itself wouldn't be sufficient. So I 10 don't know if we can totally rely on that, but 11 anyway. 12 MR. HYATT: Your Honor, too much was made 13 about Hitachi; not because it's so important, but 14 because they want to make a lot out of it. 15 What happened is Mr. Roth was given the 16 opportunity -- 17 MR. HORTON: Can you include dates, months, 18 and years in your discussions as well? 19 MR. HYATT: Hitachi was -- the 20 negotiations, I think, took place, started in the 21 first quarter of '92, continued into the second 22 quarter by -- not by me, but by Pretty Schroeder and 23 Mahr Leonard. And I think I was asked to sign the 24 agreement in Texas after -- after the first half of 25 1992. 26 But other than Hitachi, all of the others 27 were -- and there's a lot of evidence of that -- 28 were negotiated outside of California, and to a very 77 1 large degree outside of Californ -- outside of the 2 U.S. 3 For example, these four license -- excuse 4 me, the microphone. The four licenses in the 5 $24 million error thing, that was Philips traveling 6 to Japan to negotiate them. And then they, um -- 7 they signed the agreements without any assistance 8 from me and then collected the money in New York. 9 So those were negotiated outside of California and 10 outside of the U.S. 11 Relative to Sharp, NEC and Sony -- which 12 were signed in December '91 and I received my share 13 in January '92 -- those were negotiated by Mahr 14 Leonard in Japan. 15 The Japanese companies usually didn't come 16 to the U.S. to negotiate like they did with Hitachi, 17 and Mahr Leonard traveled to Japan regularly to 18 negotiate with those Japanese companies. Usually 19 they had at least several meetings lined up with 20 different companies for efficiency, and with several 21 licensing clients. Philips wasn't the only one. 22 Did that answer your question, Your Honor, 23 or did I. -- 24 MR. HORTON: It does. Let me go to the 25 Department. 26 I get the Department's -- I don't get it. 27 I shouldn't do that -- original argument was one of 28 residence and sourcing coincide; wherever the 78 1 residence is, that's the sourcing. 2 The appellant has testified that 3 negotiations took place outside of California on 4 these other deals. You have any contemporaneous 5 evidence to refute that? 6 MR. HILSON: I don't. When there's -- 7 there's very little, very little on those other 8 contracts. I'd share it with you if I had it. I 9 know the contracts were there. What happened with 10 them, I honestly -- there's not -- there's not the 11 volume of documentation pertaining to them as there 12 is some of these other deals. 13 MR. HORTON: What's the basis for picking 14 'em up? 15 MR. HILSON: They are an adjunct of the 16 California business situs that existed in 1991. It 17 is still Philips performing work on behalf of 18 Mr. Hyatt and Mr. Hyatt's licensing business that is 19 headquartered in California and a continuation of 20 the master plan that has been developed and 21 implemented throughout all of this. 22 MR. HORTON: True, but it appears to be a 23 condition subsequent to that activity. That that 24 condition subsequent is totally unpredictable as to 25 what could have happened. And it could not have 26 happened at all, that the activity germane to that, 27 as you said earlier, the earning of the funds, that 28 activity appears to be subsequent and conditional. 79 1 So how do you tie the two together? 2 MR. HILSON: I'm not certain I understand 3 what you mean by conditional. 4 MR. HORTON: Well, let's say in 1991, 5 hypothetically -- no, I don't -- in 1991, could you 6 have predicted these other transactions based on the 7 activity that occurred in 1991? 8 MR. HILSON: No. 9 MR. HYATT: Your Honor, may I? 10 MS. HARKEY: Member -- no, no. I think -- 11 MR. HORTON: Sir, please. Mr. Hyatt. 12 MR. HYATT: Thank you, Your Honor. 13 There's a blatant misrepresentation about 14 no evidence. Absolutely not. That's what I've been 15 accused of all along, destroying evidence, 16 concealing evidence. No evidence at all. 17 What happens is there's a significant 18 amount of evidence that Philips was traveling the 19 world to negotiate licenses on my patents. For 20 example, Philips was obligated to send me quarterly 21 reports and these quarterly reports -- 22 MR. HORTON: Where did they send these 23 reports? 24 MR. HYATT: Well, they initially were 25 sending it to my former -- to my Cerritos p.o. box 26 and they, in '92, they shifted over and started 27 sending them to, um, my Nevada addresses, but there 28 still was a little bit of waffling. 80 1 MR. HORTON: Why -- why did they send you 2 those reports? Just to update you or -- 3 MR. HYATT: No. This was a contractual 4 obligation and I required it. Because I couldn't -- 5 I needed to know how much money they were getting in 6 and how much they were deducting for expenses and 7 things of that nature. 8 MR. HORTON: And what would happen if you 9 didn't agree with the activity? 10 MR. HYATT: I -- I really appreciated what 11 Philips was doing and I would have been very, very 12 careful about challenging them even if there was a 13 mistake. But I never found a mistake in all the 14 five years that they were sending me those reports. 15 But, Your Honor, if I might make the point. 16 They traveled the world over and they accrued 17 expenses and they had all of these licensing 18 experts, typically Team A from New York and Team B 19 from Eindhoven -- from the Netherlands. And they 20 had in these expense reports that were attached to 21 the quarterly statements, the name of the expert and 22 the details of all of his expenses that they were 23 deducting from the income. 24 So there's a tremendous amount of really 25 solid information on these -- on these worldwide 26 travel and negotiations. 27 MR. HORTON: What role did the California 28 lawyer play in those transactions? 81 1 MR. HYATT: None at all as far as the 2 quarterly statements were concerned -- 3 Oh. No, I take that back. The Pretty 4 Schroeder and Mahr Leonard charges, all of the 5 charges, all of the expenses that Philips deducted, 6 including Pretty Schroeder in California and Mahr 7 Leonard in Texas, were included in those quarterly 8 reports. 9 MR. HORTON: Who had these meetings in 10 California that the FTB delineated? 11 MR. HYATT: Well, there -- 12 MR. HORTON: And what was the purpose of 13 those meetings? 14 MR. HYATT: Thank you, Your Honor. 15 The interference was a major issue and 16 Pretty Schroeder was taking the lead in the 17 interference proceeding, and I was the inventor. 18 And we had witness -- and the interference 19 proceeding was -- 20 MR. HORTON: Okay. Can you elaborate on 21 the interference? 22 MR. HYATT: Yes, Your Honor. I had a 23 patent, a very important patent, and Texas 24 Instruments invoked a proceeding called an 25 interference which said that they have a patent that 26 they copied -- essentially, they copied my patent 27 claims, which is okay -- 28 MR. HORTON: What did the interference -- 82 1 to some degree I'm asking leading questions. But to 2 what degree did the interference -- to what degree 3 did the interference activity have to do with the 4 income generated? 5 MR. HYATT: Very little. Some would say 6 that the interference interfered with it because the 7 companies were not sure if that patent would survive 8 or not. The flip side is if it didn't survive then 9 the license they took would have had less value. 10 But if it did survive, it would have enormous value. 11 So it was a balancing for the licensees. 12 But the, um -- that was one of 23 patents, 13 and the others were important patents also. 14 The -- but the interference was a patent 15 office proceeding and, um, it -- it had witnesses 16 and expert witnesses and the like. It was almost 17 like a litigation. And I was the inventor and the 18 primary witness on that. Even though it really 19 wasn't involved in the licensing, Philips took over 20 the responsibility for it because I needed that help 21 and they generously took that over. 22 MR. HORTON: Question of FTB. The activity 23 that occurred in California, any of it related to 24 negotiating the -- the transactions that occurred 25 subsequent to January 1992? 26 MR. HILSON: Oh, yes. As I went on at 27 length, all of the Hitachi, all of the wining and 28 dining, the golf course, the meetings at the Four 83 1 Seasons. 2 MR. HORTON: And who -- was Philips 3 involved in that? 4 MR. HILSON: No. That's -- it was all in 5 California. It's primarily Mr. Roth. Mr. Roth's 6 billings indicates sometimes Mr. Hyatt is there. I 7 can't -- I'm not going to tell you he was there all 8 the time. But there are billings and pass-through 9 expenses like meals and whatnot that show that 10 Mr. Hyatt was at some of it. But all of that is 11 done in California. 12 And the -- while all of this is going on, 13 you mentioned the interference action, the 14 interference was a claim against the 516 patent. 15 This business took off with the 516 patent and 16 the -- you know, without it, I'm not sure based upon 17 the documents and reviewing that this ever would 18 have gotten off and taken off the way it did. 19 Mr. Roth -- 20 MR. HORTON: Wouldn't the interference 21 speak to the value and not necessarily the 22 transaction, negotiation? 23 MR. HILSON: Well, if -- my point is that 24 that -- the 516 is the microprocessor patent. 25 MR. HORTON: Got it. 26 MR. HILSON: And without it there's the 27 possibility -- based upon my review of the 28 documents, it's a very real possibility that this 84 1 business licensing agreement -- business would have 2 never gotten off the ground. 3 Mr. Roth is the lead in protecting that 4 very important business asset. And all of that is 5 happening in California throughout all of this, 6 including throughout 1992. 7 MR. HORTON: Mr. Hyatt. 8 MR. HYATT: Thank you, Your Honor. That is 9 absolutely wrong. Here you have a tax attorney 10 making up stories about patent licensing and patent 11 prosecution and things like that that he apparently 12 knows nothing about or is misrepresenting it. 13 What happened is the 516 pat -- the 14 licenses, I did deal with 23 patents. But it 15 also -- they always include, Your Honor, they always 16 include continuations and divisionals and 17 continuations in part of these parent applications. 18 And in that interim that the 516 patent was 19 being interfered with, if I could call it that, 20 other patents were issuing that were included in the 21 license agreement by -- by that provision that 22 continuing applications are also included. 23 So here were much, much more important 24 patents that were issuing to me that these licensees 25 were getting licenses on. 26 For example, I'll just take a moment of 27 your time, the issue in the 516 patent was on a 28 single-chip computer. A single-chip is a, in some 85 1 cases, a $1 item. 2 MR. HORTON: Can you make sure you tie your 3 testimony to the transactions in question. 4 MR. HYATT: Okay. May I comment on that -- 5 that -- 6 MR. HORTON: Sure. 7 MR. HYATT: -- one point. 8 The continuing applications were on 9 systems. For instance, I got a -- a really great 10 patent with a lot of claims in it that covered the 11 personal computer patents. 12 MR. HORTON: Was that related to the 13 Hitachi or the Texas transaction or the other one? 14 MR. HYATT: To all of them, Your Honor, 15 because there was a continuation of it and it was 16 added by reference to the list of 23 patents. 17 And I would much rather get a one percent 18 running royalty on a -- on a thousand dollar 19 personal computer than a one percent running royalty 20 on a $1 single-chip. 21 So the, um -- the portfolio was gaining 22 value as time went on rather than losing value 23 because of the interference on the 516 patent. 24 MR. HORTON: Okay. So you've testified as 25 to what Philips' activity was and where some of 26 those transactions were negotiated. Did you have 27 any involvement in those transactions while in -- 28 did you have any involvement in those transactions? 86 1 MR. HYATT: Not in the transactions 2 themselves, but Philips asked me to do things. Some 3 things I voluntarily did. They certainly asked me 4 to sign some -- 5 MR. HORTON: So what was the purpose of 6 meeting with the lawyer in Los Angeles? 7 MR. HYATT: Oh. There were two, two 8 different purposes. One was the interference 9 proceeding. And the other -- and other meetings had 10 to do with the licensing because I was the inventor 11 and I needed to give them some information on that. 12 MR. HORTON: Thank you, Madam Chair, for 13 now. 14 MS. HARKEY: Member Ma, you have one more 15 question. 16 MS. MA: Okay. Yes. 17 So whose -- Mr. Hyatt, whose address is 18 6600 West Charleston, Suite 118, Las Vegas, Nevada? 19 MR. HYATT: I believe that was Mr. Kern, my 20 Nevada CPA. 21 MS. MA: Okay. So you list him as your 22 business address on your Schedule C. 23 MR. HYATT: Yes. I had an office at his 24 place in the -- during the disputed period when I 25 engaged him, he offered to let me use an office at 26 his facility, and I used that for meetings and such. 27 I used his conference rooms for meetings and some of 28 his facilities. Yes, he was very generous. 87 1 MR. HORTON: Member Ma, what was the date 2 on that? 3 MS. MA: Huh? 4 MR. HORTON: The date? 5 MS. MA: This is a 1992 return, Schedule 6 C. 7 So, um -- so I guess, to the Franchise Tax 8 Board, if we are using the -- the address for the 9 California homes, the faxes, all the professionals 10 for 1991 -- which I agree with. I said, you know, I 11 don't believe he entirely severed his residence, 12 therefore he was still a California resident in 1991 13 and he's still doing business. 14 But then in 1992, if we all agree that he 15 moved as of April 3rd, 1992 and his business, which 16 he is a Schedule C sole proprietor, would presumably 17 follow him. He doesn't have any sort of office. 18 He's not in the home anymore, he's moved. And he's 19 renting space out of his CPA. And even your 20 calendars show, you know, based on your calendars of 21 where he was, obviously, you know, September, 22 October, November, December lots of blue, meaning 23 he's in California. January, February, March 1992 24 lots of blue, he's in California. And then in April 25 1992 he's hardly in California. 26 So wouldn't that show, if he's a sole 27 proprietor Schedule C, that his business would have 28 moved on April 3rd and therefore he would be 88 1 allocated income for California sources before he 2 moved? 3 And I understand, you know, Betty, I was -- 4 Ms. Yee, I'm also kind of working through that, you 5 know, in 1991 if I don't think he moved to Nevada, 6 then he still did business in California. And I 7 understand that this is all continuing business, 8 right. 9 So what you're saying is 1992 is all 10 continuing business contracts for -- as 1991, 11 nothing has changed. But if he is a sole proprietor 12 and we are talking about business licenses when he 13 opens a business, he files his sole proprietor on 14 his Schedule C, he moved, everyone seems to agree 15 that he moved as of April 3rd, 1992. Why wouldn't 16 we be allocating that income? 17 MR. HILSON: To Nevada? 18 MS. MA: Yes, since he has business now in 19 Nevada. 20 MR. HILSON: There's nothing to show that 21 the business activity in California has ceased. 22 The patents, the patent licensing that is 23 coming out of it has developed in California. The 24 situs is there. That is where the work is being 25 done. It continues throughout 1992. 26 All of the work with Hitachi is being done 27 in California. Mr. Roth is ramrodding this. The 28 wining, the dining, the golf exercise, the data 89 1 reviews, the data research, all of this is being 2 done in California. 3 The defense of the 516 patent is all being 4 done through California. There is nothing to show 5 that that business has up and relocated to Nevada 6 even though Mr. Hyatt may be there himself. 7 The business activity is being maintained. 8 The business pursuit is continuing to be pursued in 9 California. The Hitachi money is coming in through 10 California. It's being disbursed through 11 California. It's the same activity that was going 12 on during 1991 even though he is -- he may have 13 physically moved to Nevada in 19 -- in 1992. 14 MS. MA: Okay. Mr. Hyatt. 15 MS. HARKEY: I would just -- let me just -- 16 let me just respond a little bit to some of this. 17 I, you know -- because you have an attorney 18 in Los Angeles that is actually contracted through 19 a -- through, what, Philips? Does not mean that he 20 is conducting business in Los Angeles. And the fact 21 that he goes in periodically for a meeting to 22 explain something or sign something does not mean 23 he's got a business in -- in California. 24 His business was inventing, and I can't say 25 this clear enough. He was an inventor and he 26 licensed patents. But he didn't do it, he 27 contracted that out. It was not a contract of sale. 28 It was a clear royalty payment. 90 1 If you establish that he had all this stuff 2 coming into California, you know, I mean, I -- I 3 think we've got declarations showing that they 4 were -- they were mailing it to the wrong place or 5 sending it to the wrong place. 6 And I understand the 1991 will still be 7 billed because that is -- that is our determination, 8 that he had a residence in 1991 in California. But 9 for 1992, there's clearly a very strong case that he 10 was not operating a business. He had a -- he was 11 accepting royalties. These contracts were 12 negotiated out-of-state. 13 And I don't -- I don't really understand 14 how we can keep going back over the same data and 15 ask this gentleman to keep explaining the same data 16 over and over again. At some point we have to make 17 a decision here as to what we believe happened. 18 Is it believable that he had a business in 19 California when he was living in Nevada? Is it 20 believable that the FTB determines that all income 21 that comes in from anything that ever was begun in 22 California now is California-sourced? If that's the 23 case, then what about '93, '94, '95, '96, whatever 24 came in after that? 25 I just think we've got to have a cutoff 26 point somewhere, and I think that the -- you know, 27 adding -- like I said, it's adding insult to injury 28 to have this increase to, you know, just because the 91 1 payments came in or the contracts were signed. He 2 claims the contracts were signed in New York and 3 that he did travel around. He's an inventor, he's 4 not negotiating stuff on his own. He's hiring 5 somebody to do that for him. 6 You know, I don't mean that he's not 7 involved. He's probably a very much a hands-on guy. 8 It's a lot of money. But I just really don't 9 understand how we can keep beating this up. 10 MS. MA: To follow, so did Mr. Hyatt 11 receive money from these same contracts in '93, '94, 12 '95, '96, '97? I mean how long do these payments 13 come? 14 MR. HYATT: Your Honor, there was a whole 15 string of additional licenses that Philips 16 negotiated with many other companies, until 1995 17 when the auditor sent out letters to my Japanese -- 18 to the Japanese licensees. And then they said 19 Mr. Hyatt's in trouble and stopped taking 20 licenses. 21 The -- so it did continue -- they did 22 continue past '92. The Philips licensing 23 activities. Philips didn't use Mahr Leonard, they 24 did it all themselves. They did a lot of traveling 25 of the world. They negotiated, not only in Japan, 26 but they have negotiators in Taiwan and in Korea, 27 although they didn't close any licenses with them. 28 It was a worldwide organization that they had. 92 1 MS. MA: And so to the Franchise Tax Board, 2 did you issue any letters for '93 or '94 saying -- 3 MR. HILSON: No. 4 MS. MA: Why? 5 MR. HILSON: The only -- the two years in 6 question were 1991 and 1992. That was it. 7 MS. MA: So then '93, presumably, he 8 didn't -- he filed a nonresident -- did file 9 anything. 10 MR. HILSON: Didn't file anything. 11 MS. MA: So why wouldn't it be the same 12 logic -- 13 MS. HARKEY: Well, that's what I'm 14 saying. 15 MS. MA: That it's a continuation of the 16 prior 1991, '92, '93, '94? Like why -- why didn't 17 you -- 18 MS. YEE: I don't think -- those years 19 aren't properly before us. 20 MR. RUNNER: He can speak. 21 MS. MA: Right. Well, I understand that's 22 a residency argument so that's why we're -- 23 MR. RUNNER: They stopped. 24 MS. HARKEY: So they stopped. They got 25 a -- 26 MS. MA: We're talking about residency, but 27 then now you're saying the sourcing is different 28 than the residency and therefore it continues. 93 1 MS. HARKEY: Yeah. 2 MS. MA: But then in '93, '94, '95, 3 presumably, you accepted that he was no longer a 4 California resident, did not do business in 5 California. He didn't file a California tax return, 6 presumably, I don't know. You never issued letters. 7 So, I don't know, it's -- 8 MR. HILSON: I -- I wasn't around in 1993. 9 All I know is '91 and '92 are the years in 10 controversy. Nothing happened with '93. Why or why 11 not, I don't know. 12 MS. HARKEY: I am -- 13 MS. YEE: I'm ready to make a motion. 14 MS. HARKEY: I'm ready to make a motion as 15 well, get this rolling. Because I think -- I think 16 we're just -- this is -- this is not good. Anyway. 17 Okay, I would like to make a motion to 18 grant for the taxpayer on the situs. I believe he 19 was a Nevada -- the business was -- had a situs in 20 Nevada, if it was a business. 21 MR. RUNNER: For the year 19 -- 22 MS. HARKEY: For the year 1992. 23 MR. RUNNER: Second. 24 MR. HORTON: Now, based on previous rules 25 does that mean we can't ask anymore questions? 26 MS. HARKEY: Yeah, you should not be going 27 back and forth at this point. There's a motion and 28 there's a second. 94 1 Do you object to it? Or do you want to -- 2 MS. YEE: Objection. 3 MS. HARKEY: -- talk among the Board about 4 it? 5 MR. HORTON: Yeah, I want to object only 6 because I got some other questions. 7 MS. HARKEY: Member Horton. 8 MR. HORTON: You know, I'm just trying to 9 get to the truth. 10 MS. HARKEY: I'm trying to get to it too, 11 and the truth keeps growing. 12 MR. RUNNER: Let me ask just a basic 13 question here. Have we actually closed the public 14 hearing as a result of a motion? 15 MS. HARKEY: When you do a motion, yes. 16 MR. RUNNER: Well, let me ask -- let me ask 17 Chief Counsel. 18 MR. NANJO: Yes. 19 MR. RUNNER: Is that correct? 20 MR. NANJO: That is correct. 21 MR. RUNNER: Okay, thank you. 22 MS. HARKEY: So, would you like to -- are 23 you going to continue to ask a question of the FTB? 24 MR. HORTON: Well, I could ask, since we're 25 going by the rules, a point of clarification that 26 would supercede the motion; is that right? 27 MS. YEE: Pose it to Appeals. 28 MR. NANJO: You can ask a point of 95 1 clarification, but you can't -- you're not supposed 2 to direct it to the parties. 3 MR. HORTON: Yeah, I know. I can direct it 4 to Appeals. 5 MS. HARKEY: If you want me to withdraw, do 6 you have a real important question? 7 MR. HORTON: Well -- 8 MS. HARKEY: You're not -- you're not clear 9 after all we've heard? 10 MR. HORTON: No, you guys keep asking 11 questions, in my opinion, not necessarily on point. 12 MS. HARKEY: Oh, okay. 13 MR. HORTON: Which confuses it. 14 But the Philips activity, Mr. Hyatt -- I 15 mean -- 16 MS. HARKEY: Okay. If we're going back, 17 I'll withdrew my motion. The second will be 18 withdrawn. We'll reopen the public hearing. Is 19 that okay with everybody? 20 MS. YEE: No. 21 MS. HARKEY: Okay. No? There's an 22 objection. She doesn't want to. 23 MR. HORTON: But she didn't make the 24 motion. 25 MS. HARKEY: Okay. Okay. Is it okay -- 26 okay, I'll withdraw. 27 This is going to be a vote. So I will 28 withdraw my motion. Is there a second for me to 96 1 withdraw my motion? 2 MR. HORTON: You don't need a second. 3 MR. RUNNER: You don't need a second. 4 MS. HARKEY: Well, I mean if I withdraw my 5 motion and -- 6 MR. RUNNER: And the second agrees. 7 MS. HARKEY: And the second agrees. Okay. 8 Then we have reopened the public hearing for 9 question. 10 MR. HORTON: Mr. Hyatt, if we are measuring 11 business activity based on the preponderance of the 12 evidence, one would argue that we'd have to give 13 some sort of weight to each activity. And so the 14 question that I get to ask is, you know -- and let 15 me qualify this. I do find you to be a credible 16 witness. I mean it's just amazing your recollection 17 of all this stuff, but I guess -- 18 MR. HYATT: Thank you. 19 MR. HORTON: -- after 26 years that's what 20 happens. 21 What percentage of the -- what percentage 22 of the activity that resulted in the creation of the 23 revenue was performed by Philips? 24 MR. HYATT: Your Honor, relative to the 25 licensing, a hundred percent. In my opinion, a 26 hundred percent was performed by Philips. I was the 27 inventor and Philips had exclusive licensing 28 authority. And the involvement I had was as an 97 1 inventor and a licensee to Philips to keep informed, 2 to help them out, and to, um, restructure my life in 3 Las Vegas. 4 MR. HORTON: And while residing in Las 5 Vegas, did you need to travel to LA or California in 6 order to facilitate any of the activities that's 7 been alleged? 8 MR. HYATT: I needed to travel to Los -- to 9 California to do various things. I think there was 10 a flight to San Francisco and a -- 11 MR. HORTON: Tell me what you did when you 12 went to San Francisco, then when you went to LA, and 13 when you went to pick up the information at the 14 Cerritos p.o. box and so forth. 15 MR. HYATT: Thank you for your interest. I 16 really appreciate that. 17 The Sony people were in San Francisco for 18 their own business. Philips asked me to meet with 19 them because they wanted to meet with the inventor, 20 and I took a flight in the morning, met with Philips 21 and the, um, Sony people then I flew back. I think 22 it was on the same day, but I'm not sure. They may 23 have put me up at a hotel. 24 MR. HORTON: All right. Thank you. 25 MR. HYATT: But I met with them as an 26 inventor, not to negotiate. In fact, if I might 27 continue, Your Honor, just for a moment. 28 I was advised by the licensing people do 98 1 not talk about licensing to them. They want to talk 2 with you as an inventor, and we need to do the 3 licensing ourselves. I was told not to get into 4 those subjects. 5 MR. HORTON: Thank you very much. All 6 right. Thank you for indulging me, Members. 7 MS. HARKEY: Sure. 8 Okay. Should I throw my motion out again? 9 I know I have one objection. 10 I'll make a motion to find for the taxpayer 11 that the -- for 1992, that the situs was in Nevada, 12 business situs was in Nevada. 13 MR. RUNNER: Second. 14 MR. HORTON: Members, I don't know if it 15 was in Nevada, but certainly -- I don't know if it 16 was in Nevada, but certainly there's a lot of 17 activities occurring outside of California. And the 18 foundation that was established for this revenue 19 that occurred in California in 1991 is not 20 dispositive relative to subsequent transactions. I 21 don't know how we can hold that just because this 22 occurred, the negotiations were going to take place. 23 Maybe some other Member's -- 24 MS. YEE: Madam Chair. 25 MR. HORTON: -- got some -- 26 MS. YEE: Yeah. 27 MR. HORTON: Member Yee. 28 I mean I'm not -- apologies, Madam Chair. 99 1 I just want to hear from my colleagues. 2 MS. YEE: Madam Chair. 3 MS. HARKEY: Yes. Yes. 4 MS. YEE: So I feel like we're playing that 5 game where you're trying to put a pin on something 6 but you keep missing. But it is -- I mean, it seems 7 to me the question here is really between 1991 and 8 1992, did the manner in which the patents generated 9 income change? 10 And to me, residency -- this is not -- 11 sourcing and residency are two different things in 12 my mind. We established residency. 13 MR. HORTON: I agree. 14 MS. YEE: But the sourcing really has to do 15 with whether the licensing activity and 16 negotiations, just how the revenue -- how the income 17 was generated changed. 18 And from the chronology of events that was 19 provided for the first three months of 1992, it 20 seems to me it's a continuation of the same type of 21 activity. The varying degrees might be in question, 22 but similar type activity, similar players involved; 23 which suggests to me that there was not a sever of 24 the business situs in California, and that the same 25 process continued into 1992 in term of the manner in 26 which these patents generated income. 27 You still had some involvement. You 28 insisted on quarterly reports. None of that -- I 100 1 don't think anything in terms of your role, 2 Mr. Hyatt, changed between 1991 and 1992. 3 Maybe in terms of the degree that, you 4 know, some of the -- whether it be Philips or 5 anybody else, you know, may have changed. But there 6 wasn't a business situs established in Nevada. 7 Residency doesn't mean he established a business 8 situs in Nevada. But the way that the income was 9 generated from the patents remained the same. 10 And I guess my question to Appeals is, is 11 that the appropriate way to look at it? 12 MR. THOMPSON: Well, I don't want to opine 13 on whether it was the same. But I think -- 14 MS. YEE: Similar. 15 MR. THOMPSON: -- if the Board makes a 16 different business situs finding for '92, for all of 17 '92, then I would think implicit in that judgment 18 was that there was a change in the activities in '92 19 as compared to '91. 20 MS. YEE: Okay. And all I'm observing is 21 that the nature of the activities were similar 22 between the two years. And that didn't -- and there 23 was no indication that the business situs had been 24 severed in California as a result of how the income 25 was generated from the patents between the two 26 years. 27 MR. HORTON: Well, in 1991, I mean there 28 was participation in the negotiations, signing of 101 1 contracts that occurred, meetings with the lawyers 2 to kind of look specifically at the contracts in and 3 of themselves. 4 Subsequent to that, the testimony is is 5 that Philips negotiated all of these agreements. In 6 fact, the appellant flew out-of-state to actually 7 sign it. No signing -- no evidence of any signing 8 of a contract in California. 9 MS. YEE: Or Nevada. 10 MR. HORTON: Or Nevada. But -- 11 MR. RUNNER: That doesn't make any 12 difference. 13 MR. HORTON: -- there is evidence that he 14 flew out. And -- and at that point, much like in 15 many transactions, the initial steps of the 16 transactions are very activity-intense. And then 17 once you establish a relationship, which it appears 18 to indicate Philips appears to have just taken over 19 and began to do all of these negotia -- as they were 20 contracted to do. 21 So unless the Department, which they can 22 have submitted some evidence to contradict that, 23 which they have not -- in fact they indicated that 24 they have no evidence to contradict any negotiations 25 that took place in California. The preponderance of 26 the activity was handled by Philips, and maybe 27 Hitachi. Might go back and take a look at Hitachi 28 and maybe Hitachi itself was kind of consummated 102 1 prior to 1992, and the subsequent receipt of the 2 fundings from Hitachi would have flowed irrespective 3 of any activity. 4 I do see a change. 5 MS. HARKEY: Member Runner. 6 MR. RUNNER: Yeah. I think the change that 7 I would point out would be I think that was pointed 8 out in regards to was to identify business location 9 in 1992, that was -- that would make that a little 10 different, makes that a different in fact. 11 MR. HORTON: You know, but that occurred in 12 December. 13 MR. RUNNER: Mm-hmm. 14 MR. HORTON: But to Member Ma's -- 15 MR. RUNNER: No, that was his business 16 license. 17 MR. HORTON: Pardon? 18 MR. RUNNER: The -- the -- the issue of his 19 tax return, that was for 1992, which would be all of 20 1992, identified a Nevada business location. So, to 21 me, that's a pretty specific issue that is factually 22 different, um, in that regard. 23 So, you know, to me if we're looking for 24 things that are different, that certainly would be 25 on a list of things that're different from 1992 to 26 1991. 27 MR. HORTON: All right. 28 MS. HARKEY: Okay. Is there any objection? 103 1 Member Ma? Are we ready to vote? 2 MS. YEE: Mm-hmm. 3 MS. HARKEY: Please call the roll. 4 MR. HORTON: I mean, I would ask that you 5 amend your motion to say -- to indicate that -- 6 MS. HARKEY: The sourcing was -- 7 MR. HORTON: -- that the sourcing 8 occurred -- 9 MS. HARKEY: -- in Nevada? 10 MR. RUNNER: Outside of California. 11 MR. HORTON: Outside of California. 12 MS. HARKEY: Outside of California. Yeah, 13 that's better than saying establishing situs because 14 I really don't -- I don't want to -- okay. So 15 I'll -- 16 MR. HORTON: That the preponderance of the 17 evidence indicates that the -- I mean the evidence 18 indicates that the preponderance of the activity 19 relative to sourcing, from a business perspective, 20 occurred outside of California. 21 MS. HARKEY: Okay. I will thus so amend my 22 motion. 23 MR. HORTON: Schedule C and all the 24 other -- 25 MS. HARKEY: Let me repeat it. That the 26 preponderance of evidence suggests to me or displays 27 that the sourcing for 1992 was outside of 28 California. 104 1 MR. RUNNER: And I'll second that. 2 MS. HARKEY: Okay. So that is the motion. 3 We have one objection. 4 MS. YEE: Objection. 5 MS. HARKEY: Would you like to call the 6 roll? 7 MS. RICHMOND: Yes. Chairwoman Harkey. 8 MS. HARKEY: Aye. 9 MS. RICHMOND: Mr. Runner. 10 MR. RUNNER: Aye. 11 MS. RICHMOND: Mr. Horton. 12 MR. HORTON: Aye. 13 MS. RICHMOND: Ms. Ma. 14 MS. MA: No. 15 MS. RICHMOND: Ms. Yee. 16 MS. YEE: No. 17 MS. RICHMOND: Motion carries. 18 MS. HARKEY: 3-2, okay. 19 Your sourcing for '92 is not in California. 20 So all of '92 is finished, is that -- yes, 21 I think those are all the issues. Because if it's 22 not sourced, there's no interest. Is that correct? 23 MR. THOMPSON: I believe so. 24 MS. HARKEY: Okay. Then I think we are 25 finished. 26 Thank you. This was a lot of work. I 27 really appreciate all the attention, and I 28 appreciate you allowing me to curtail the 105 1 conversation a little bit. We all had a lot of 2 information. Both sides presented a ton of 3 documentation. So I do appreciate it and thank you 4 very much. 5 Yes, sir? 6 MR. HYATT: Your Honor, I really appreciate 7 the interest and the help that your -- the Board has 8 given. Thank you so much. After all of this 26 9 years or more, it's finally over with. 10 MS. HARKEY: I'm glad to hear that. Thank 11 you so much. Thank you so much. 12 Go out and -- I don't know -- play some 13 golf or something. Seems like you've been living 14 and breathing this for 26 years. See if you know 15 what else to do. What are you going to do with your 16 spare time? 17 Okay. Anyway, I don't know about you; when 18 I get through with a project, I've got a void, don't 19 know what to do. 20 ---oOo--- 21 22 23 24 25 26 27 28 106 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Kathleen Skidgel, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on August 29, 2017 I recorded verbatim, in 10 shorthand, to the best of my ability, the 11 proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 106 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: October 30, 2017 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 107